Hardship Withdrawal from 401k

My employee wants to take a hardship withdrawal from his 401k account. Are such withdrawals allowed and what should I know about them?- James Gallagher from Covington, Kentucky runs a sports outfits retail store.

Your employees can make a withdrawal from their 401k accounts if they have an ‘immediate and heavy’ financial need. In fact, this is one of the biggest benefits they derive from participating in a qualified retirement benefit plan like the 401k. The savings they have in the plan act as their financial back up plan when they need emergency funds. Here is what you, as the employer, should know about such ‘hardship withdrawals’.

The employee needs your approval to take the funds out from his 401k account. You can ask him to provide documentary evidence to prove his financial need. Generally, withdrawals are allowed if they will be used to meet expenses related to:

  • Home purchase (if it is the employee’s first home)
  • Higher education for the employee’s family member
  • To pay off debts that will help prevent eviction proceedings
  • Tax deductible medical costs that he cannot pay from any other source

Remember that the withdrawal amount should be sufficient to satisfy the financial need. It should neither be substantially larger than the need nor significantly smaller. Another important point to know is that a withdrawal cannot be repaid like a 401k loan. The 10% penalty will apply on these funds and the employee will also have to pay tax on them.

Keep track of your employee’s withdrawals by updating his records as soon as the funds have been disbursed from his account. If you are using a DIY 401k package like http://401keasy.com/, you can do this quickly and easily.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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