The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Alabama is representative of a common inquiry regarding hardship distributions from 401(k) plans. The advisor asked:
“Could a 401(k) plan participant qualifying for a hardship distribution if the financial need relates to expenses of a spouse, dependent or beneficiary of the participant?”
- Carefully read and follow the hardship distribution section of the governing plan document as that language will specify the rules to follow for hardship distributions (e.g., for what purposes and whose expenses, etc.). “The determination of the existence of an immediate and heavy financial need and of the amount necessary to meet the need must be made in accordance with nondiscriminatory and objective standards set forth in the plan.” [Treas. Reg. Sec. 1.401(k)-1(d)(3)(i)]
- For those plans that follow the safe harbor or “deemed” definition of what constitutes immediate and heavy financial needs found at Treas. Reg. Sec. 1.401(k)-1(d)(3)(iii)(B), several of the listed expenses can be expenses of the participant’s spouse, dependents and/or beneficiaries (see Notice 2007-7, Q&A 5).
- Qualifying expenses pursuant to the safe harbor reasons for hardship distributions are summarized below:
— Deductible medical expenses incurred by the plan participant, his or her spouse, dependents, or plan beneficiary;
— Costs directly related to the purchase of the participant’s principal residence (but not mortgage payments);
— Tuition and related educational fees, such as room and board for the next 12 months for the participant, participant’s spouse, dependents, or plan beneficiary;
— Necessary payments to prevent foreclosure on the mortgage of the participant’s principal residence or eviction from the participant’s home;
— Funeral expenses for the participant, participant’s spouse, children, parents, dependents, or plan beneficiary; or
— Expenses to repair casualty damage to the participant’s principal residence.
Conclusion
In addition to expenses incurred by a plan participant, certain expenses of a participant’s spouse, dependents and/or beneficiaries may qualify as expenses for a hardship distribution from a 401(k) plan. Check the plan document for prescriptive language regarding hardship distributions.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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