More about Hardship Withdrawals

Should I allow a hardship withdrawal provision for my small business 401k? Can my employees withdraw funds from their 401k interim even if I do not specifically allow hardship withdrawals for the plan? Lisa C. Page, Providence, RI 02908

You definitely need to expressly allow hardship withdrawals for your employees to be able to withdraw funds in this way. If your plan document does not clearly state that such withdrawals are possible, your employees cannot use their 401k funds to meet financial emergencies. TheIRSleaves it entirely to your discretion whether you want to include this option in your plan or not.

Enabling such withdrawals makes it possible for employees to meet non reimbursable medical expenses that are due, buy their first home, pay off debts to avoid foreclosure or eviction or pay for a family member’s education. In fact, the funds in your employee’s 401k account can be used for such purposes for a spouse or dependent child too. It is a wonderful financial backup in event of a financial emergency. Your employees will surely appreciate if you do have a provision for hardship withdrawals included in your 401k plan documents.

Keeping track of such withdrawals is very critical because the employee who withdraws in this manner needs to adhere to certain conditions. For instance, if he is not over 59 ½ years old, he is liable to pay a 10% penalty from the withdrawal amount. Plus, the employee cannot contribute to the 401k for the following six months. Unless you are using a DIY software suite like to manage your 401k, tracking withdrawals can pose problems.

Remember that the withdrawal is not a loan from the 401k and cannot be paid back. Make sure that your employees know that any withdrawals will permanently reduce their 401k balance. This should help them objectively decide when they should resort to this provision.

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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