What is the 401(k) hardship rule?


Quick Answer

The 401(k) hardship rule gives employees in financial need the option to request an early withdrawal from their 401(k) accounts before the appropriate retirement age for reasons of financial hardship, such as pending eviction or medical bills, explains the IRS. Not all 401(k) plans offer hardship distributions and may charge the 10-percent penalty, as with other early 401(k) withdrawals.

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Full Answer

Medical expenses exceeding 10 percent of the employee's gross income qualify for 401(k) hardship distributions, assuming the withdrawal takes place during the same year the medical expenses occurred, explains Bankrate. People with permanent, extreme disabilities may qualify for hardship distributions.

Tuition and education fees may also qualify for 401(k) hardship distributions, states the IRS. Other potential reasons for 401(k) hardship distributions include burial and funeral expenses and damage to a person's principal residence.

Before receiving a 401(k) hardship distribution, employees need to consider other options, such as the liquidation of assets, as employers may assess the property and assets owned by an employee before agreeing to a hardship distribution, explains the IRS. Employers may deny hardship distribution if they know that employees have other options.

Employees older than 59 1/2, employees retiring from a company at 55, or emergency service workers retiring at 50 may start taking the usual 401(k) withdrawals without penalty, states The Motley Fool. After taking a hardship distribution, employees generally cannot make any elective 401(k) contributions during the following six months, states the IRS.

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