What Qualifies as a Hardship Withdrawal?

A hardship withdrawal is an in-service distribution from a retirement plan, such as a 401(k), taken in response to a significant financial burden. It is not a loan and does not require repayment. This type of withdrawal is governed by strict criteria established by the Internal Revenue Service (IRS) and the specific rules of an individual’s retirement plan. To qualify, an individual must demonstrate an “immediate and heavy financial need,” and the amount withdrawn must be necessary to satisfy that need. Not all retirement plans permit hardship withdrawals, so consult the plan’s documents first.

Recognized Hardship Events

To take a hardship withdrawal, an individual must meet the “immediate and heavy financial need” test defined by the IRS. While plans can establish their own criteria, most adhere to seven “safe harbor” events that automatically meet this standard. These pre-approved circumstances provide clear guidelines for employees and plan administrators.

A common qualifying event is for medical care expenses for the employee, their spouse, dependents, or a primary beneficiary. The expenses must be for costs that would be deductible under the Internal Revenue Code, including payments for the diagnosis, treatment, or prevention of disease.

Another recognized event involves costs directly related to purchasing an employee’s principal residence. This provision is for the down payment and associated costs but explicitly excludes mortgage payments. The purpose is to help an employee secure a primary home, not subsidize its long-term ownership.

Payment of tuition, related educational fees, and room and board for the next 12 months of postsecondary education is a qualifying event. This can apply to the employee, their spouse, children, dependents, or a primary beneficiary. The funds must be for upcoming educational expenses, not for paying off existing student loans.

Payments necessary to prevent the eviction of the employee from their principal residence or to stop a foreclosure on the mortgage for that home also qualify. This provision addresses immediate housing crises by providing a way to access funds to maintain stable living arrangements.

Withdrawals are also permitted for funeral or burial expenses for the employee’s deceased parent, spouse, children, dependents, or a primary beneficiary. This allows families to manage the significant costs associated with final arrangements.

Expenses for the repair of damage to an employee’s principal residence also qualify. The damage must be a type that would be eligible for a casualty deduction, such as from a fire or storm. It does not need to have occurred in a federally declared disaster area.

A seventh category addresses expenses and losses incurred by an employee due to a disaster in an area designated by the Federal Emergency Management Agency (FEMA) for individual assistance. This includes loss of income and other costs resulting from a federally declared disaster.

Required Information and Documentation

After establishing a qualifying event, an employee must prove the withdrawal is necessary to satisfy the financial need, meaning the amount cannot be more than what is needed. The employee must also show that other financial resources are not reasonably available. While federal rules no longer require taking a plan loan first, an individual plan’s rules may still mandate it.

The employee must provide a written or electronic statement attesting to the financial need, that the withdrawal amount is not excessive, and that other resources have been exhausted. The plan administrator is responsible for ensuring the withdrawal is substantiated and cannot rely solely on the employee’s self-certification.

The employee is responsible for gathering and retaining source documents as proof of the hardship. For example, for medical expenses, this would include unpaid invoices from healthcare providers. For a home purchase, a signed purchase agreement is required, and for tuition, an official invoice from the educational institution is necessary.

The plan administrator or a third-party provider will supply the required hardship withdrawal application form. All gathered documentation will be used to complete this form, so it is best to have materials ready before starting the application.

The Application and Distribution Process

After confirming a qualifying event and gathering documentation, the next step is to apply. This begins with obtaining the official application package from the plan administrator or the company’s human resources department.

The completed application, along with any required attestations or supporting documents, must then be submitted. Common submission methods include uploading the package to a secure online portal or mailing a physical copy, as dictated by the plan’s procedures.

The plan administrator then reviews the submission to ensure it meets all plan and IRS requirements, which can take several business days. They verify the reason for the withdrawal is valid and that the amount requested aligns with the documented need.

After approval, the distribution of funds is initiated. The timeline for receiving money ranges from a few business days to a couple of weeks, depending on the plan. Funds are disbursed via direct deposit or by a paper check.

Tax and Penalty Implications

Taking a hardship withdrawal has significant financial consequences. The money received is subject to both taxes and potential penalties, which can substantially reduce the net amount an individual receives.

The entire amount of the hardship withdrawal is treated as ordinary taxable income in the year it is received. It is added to the employee’s other income and taxed at their marginal federal income tax rate. For instance, a person in the 22% federal tax bracket taking a $10,000 withdrawal would owe $2,200 in federal income tax, and state taxes may also apply.

A hardship withdrawal does not automatically exempt an individual from the 10% early withdrawal penalty. If the employee is under age 59½, this additional tax will generally apply to the distribution. This penalty is assessed on top of the ordinary income tax.

Unlike a 401(k) loan, a hardship withdrawal cannot be repaid to the plan, which permanently reduces retirement savings and future tax-deferred growth. While federal rules removed the requirement to suspend contributions for six months after a withdrawal, you should check your plan documents to understand any impact on future contributions.