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Benefits in a plan are dependent on a participant’s account balance at the time of distribution.
When participants are eligible to receive a distribution, they typically can elect to:
When such a transaction occurs, the distribution is subject to a mandatory withholding of 20% unless the money is reinvested within 60 days. The exciting news is that traditional and Roth (after tax money) IRA's are now accepted as qualified plans eligible for rollover. Please refer to the Summary Plan Description as to the availability of distributions in the plan.
Here is a condensed list of transactions that are not eligible for rollovers:
This list covers the basics; however, a few other transactions also fail to qualify for rollover eligibility under Code Section 401(a)(31).
Unlike hardship withdrawals, all qualified plans must make provisions to allow participants to rollover their eligible distributions. The only choice the employer really has is to decide whether or not they would like to accept a rollover contribution from another qualified plan.
Although not required, a retirement plan may allow participants to receive hardship distributions. A distribution from a participant’s elective deferral account can only be made if the distribution is both:
The employer determines a participant has an immediate and heavy financial need based on the plan terms and all relevant facts and circumstances.
A distribution is automatically considered to be necessary to satisfy an immediate and heavy financial need if all of the following requirements are met:
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:
The amount of a hardship distribution must be limited to the amount necessary to satisfy the need. This rule is satisfied if:
Unless the employer has actual knowledge to the contrary, the employer may rely on the employee’s written statement that their need can’t be relieved from other available resources, including:
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.
In a 401(k) plan, hardship distributions can generally only be made from accumulated:
A plan may, but isn't required to, apply the same conditions to hardship distributions of employer nonelective and regular matching contributions as it applies to hardship distributions of elective deferrals. Some 401(k) plans may allow hardship distributions of certain kinds of contributions made to the plan before 1989.
Hardship distributions are subject to income taxes (unless they consist of Roth contributions). They may also be subject to a 10% additional tax on early distributions. Employees who take a hardship distribution can't:
The Bipartisan Budget Act of 2018 enacted three changes to these rules, specifically:
A retirement plan may (but is not required to) allow participants to receive hardship distributions. Please contact the Employer or refer to the Summary Plan Description.
Age restrictions, years of participation, or vesting requirements may apply.
Each plan is designed with different plan features, please refer to the Summary Plan Description as to the timing of plan distributions. Some plans allow distributions to occur immediately, after annual administration, or as late as retirement age.