This Daily Tax Tip Spotify Podcast and/or WordPress Blog Post is in response to requests for general information on taking a Hardship Distribution from a 401(k) Plan.
The law limits the situations in which a 401(k) plan may allow you to take distributions of your Elective Contributions under the Plan. One of the situations under which distributions may be allowed is upon hardship.
A distribution is treated as made upon hardship only if it is made “On Account of the Hardship,” which means the distribution must be both:
(1) made on account of an Immediate and Heavy Financial Need of yours and
(2) Necessary to Satisfy that Need.
A distribution on account of hardship must be limited to your total Elective Contributions as of the date of distribution, reduced by the amount of previous distributions of elective contributions.
Thus, the distributable amount generally cannot include earnings, qualified nonelective contributions (QNECs), or Qualified Matching Contributions (QMACs), other than certain grandfathered amounts.
Whether you have an immediate and heavy financial need must be determined based on all the relevant facts and circumstances. However, a distribution is deemed to be on account of an Immediate and Heavy Financial Need if it is for:
(1) Expenses for Medical Care that would be deductible as medical expenses (without taking into account the percentage of adjusted gross income floor);
(2) costs directly related to the Purchase of a Principal Residence for you (excluding mortgage payments);
(3) paying tuition, related educational fees, and room and board expenses, for up to the next 12 months of Post Secondary Education for you or your spouse, children, or dependents;
(4) payments necessary to Prevent your Eviction from your principal residence or foreclosure on the mortgage on that residence;
(5) payments for burial or Funeral Expenses for your deceased parent, spouse, children or dependents; or
(6) expenses for Repairing Damage to your Principal Residence that would qualify for the casualty loss deduction (without regard to whether the loss exceeds the specified percentage of adjusted gross income).
A distribution is treated as necessary to satisfy an immediate and heavy financial need of yours only to the extent it does not exceed the amount necessary to satisfy that need. A distribution is not treated as necessary to satisfy an immediate and heavy financial need of yours to the extent the need can be relieved from Other Resources that are Reasonably Available to you, including assets of yours or of your spouse and minor children that are reasonably available to you.
However, property held for your child under an irrevocable trust or under the Uniform Gifts to Minors Act (or comparable state law) is not treated as a resource of yours.
Please call me at your convenience so that we can discuss the Hardship Distribution Rules as they apply to your particular situation.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 06262021-01 320-820)