Distribution for current employees

 You can take qualified withdrawals from your 401(a) plan at retirement age or upon leaving your current employer. The earliest age for retirement is 59 ½. You must pay federal income tax on withdrawals from your 401(a) plan. The IRS assesses a 10 percent tax penalty for early, unqualified withdrawals

HARDSHIP DISTRIBUTIONS

 A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account. 

 

A distribution from a participant’s elective deferral account can only be made if the distribution is both:

  • Due to an immediate and heavy financial need.
  • Limited to the amount necessary to satisfy that financial need.


Immediate and heavy financial need

The employer determines a participant has an immediate and heavy financial need based on the plan terms and all relevant facts and circumstances.

  • Consumer purchases (such as a boat or television) are generally not considered an immediate and heavy financial need.
  • A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.


A distribution is automatically considered to be necessary to satisfy an immediate and heavy financial need if all of the following requirements are met:

  • The distribution isn't greater than the amount of the immediate and heavy financial need, including the amounts necessary to pay any taxes resulting from the distribution.
  • The employee has obtained all other currently available distributions (including distribution of ESOP dividends under section 404(k), but not hardship distributions) and nontaxable (at the time of the loan) plan loans, including all other plans maintained by the employer.


Safe Harbor Distributions


Under a “safe harbor” in IRS regulations, an employee is automatically considered to have an immediate and heavy financial need if the distribution is for any of these:

  • Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.
  • Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
  • Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents or beneficiary.
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
  • Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
  • Certain expenses to repair damage to the employee’s principal residence.


Limited to the amount necessary


The amount of a hardship distribution must be limited to the amount necessary to satisfy the need. This rule is satisfied if:

  • The distribution is limited to the amount needed to cover the immediate and heavy financial need, and
  • The employee couldn't reasonably obtain the funds from another source


You will need to provide a statement that the need can’t be relieved from other available resources, including:

  • Insurance or other reimbursement.
  • Liquidation of the employee’s assets.
  • The employee’s pay, by discontinuing elective deferrals and after-tax employee contributions.
  • Plan loans or reasonable commercial loans.


An employee doesn’t have to use alternative resources if doing so would increase the amount of the need. For example, an employee requesting a hardship to purchase a principal residence doesn’t have to obtain a plan loan if the loan would disqualify the employee from obtaining other necessary financing.

EARLY WITHDRAWALS

 A plan distribution before you turn 59½ may result in an additional income tax of 10% of the amount of the withdrawal, unless you qualify for another exception to the tax.  See Retirement Topics – Tax on Early Distributions for a chart of exceptions to the 10% tax.