What Qualifies as a Hardship Exemption?
Learn the standards for a financial hardship exemption, including the types of events that qualify and the documentation needed for an application.
A hardship exemption is a provision allowing an individual to be excused from a rule or penalty due to a significant financial burden. This is not a single concept; its definition and application vary by context, as the qualifications for a retirement plan are distinct from those for a government tax agency. The goal is to provide temporary relief to individuals facing pressing financial difficulties. Whether dealing with a 401(k) administrator or the IRS, the burden of proof lies with the individual to demonstrate that their circumstances meet the established criteria.
Common Scenarios That Qualify as a Hardship
Across different regulations, certain life events are consistently recognized as potential grounds for a hardship claim. Significant unreimbursed medical expenses for an individual, their spouse, or dependents are a primary example. Another common scenario involves housing costs to prevent a pending eviction or a foreclosure on a primary mortgage.
Expenses for repairing significant damage to a primary home from a casualty event, such as a fire or flood, may also be considered a hardship. The costs associated with the funeral or burial of a parent, spouse, or child are also frequently cited as a qualifying reason. A sudden disability that prevents an individual from working can create a clear financial hardship, as can certain educational expenses for the next 12 months of post-secondary education.
Information Needed for a Retirement Account Hardship Withdrawal
When seeking a hardship withdrawal from a retirement plan like a 401(k), the process is governed by IRS regulations and the employer’s plan rules. You must prove you have an “immediate and heavy financial need” that cannot be met with other resources. For each qualifying scenario, distinct documentation is required, such as unpaid medical invoices or a formal foreclosure notice.
The central document is the hardship withdrawal application form from your plan administrator. This form requires you to state the reason for the withdrawal, specify the amount needed, and certify that the amount does not exceed the actual cost and that you have exhausted other financial resources.
The Process for Requesting a Retirement Account Withdrawal
You will submit the completed hardship application package directly to your 401(k) plan administrator. Submission methods vary by plan and can often be done through an online portal, by mail, or via fax. The plan administrator will review the request to ensure it meets both IRS guidelines and your plan’s provisions.
If approved, the withdrawn amount is considered taxable income, and the plan will likely withhold a percentage for federal taxes. If you are under age 59½, you may also be subject to an additional 10% early withdrawal penalty.
Required Documentation for an IRS Hardship Program
Securing a hardship provision from the IRS, such as being placed in Currently Not Collectible (CNC) status, requires a detailed demonstration of your financial situation. The objective is to prove that paying your tax debt would leave you unable to cover basic living expenses. The primary tool for this is IRS Form 433-A or the shorter Form 433-F, which you can download from the IRS website.
You must document income from every source, verified with recent pay stubs and bank statements. You will also need to provide a complete picture of your monthly living expenses, which the IRS compares against its own collection financial standards for necessities like housing, food, and transportation. A comprehensive list of all your assets is also required, including the current value of bank accounts, investment accounts, vehicles, and any real estate you own.
Submitting a Hardship Application to the IRS
The completed form and attachments should be mailed to the specific IRS address designated in the form’s instructions, and it is advisable to send the package via a method that provides proof of delivery. Upon receipt, the IRS will begin its review process, and your case may be assigned to a revenue officer who will analyze the information.
This officer may contact you with requests for clarification or for additional documentation to verify your claims. If your request for Currently Not Collectible status is approved, the IRS will temporarily halt collection activities, such as wage garnishments or bank levies. This status is not permanent; the IRS will periodically review your financial situation.