Tax Facts

3798 / What requirements apply to hardship withdrawals from a 401(k) plan?

Editor’s Note: The SECURE Act 2.0 created new rules allowing plan participants to take emergency distributions to cover immediate financial hardships without penalty. These emergency distributions will be limited to $1,000 each year. Also, taxpayers who take emergency distributions must repay the distribution within a three-year period or will be prohibited from taking another $1,000 distribution during the following three-year period. Non-highly compensated employees may be entitled to contribute the le sser of (1) 3% of compensation or (2) $2,500 to pension-linked emergency savings accounts (PLESAs) using after-tax dollars if their employer elects to establish a PLESA. See Q3798.1 for details.
The 2017 tax reform legislationcreated new rules governing hardship distributions made because of qualified 2016 disasters. The CARES Act further expanded hardship distribution eligibility in response to the COVID-19 pandemic in 2020. See Q3799-Q3801 for details.

Hardship withdrawals may be made from a 401(k) plan only if the distribution is made on account of an immediate and heavy financial need and the distribution is necessary to satisfy the financial need.2 The distribution may not exceed the employee’s maximum distributable amount. Hardship withdrawals generally may not be rolled over ( Q 3998).3 Not all plans provide for hardship withdrawals, and plan sponsors must first look to the plan documents before determining whether a hardship distribution can be made. The final regulations cited here took effect for plan years beginning on or after January 1, 2006.4

The Pension Protection Act of 2006 called for regulations modifying the hardship requirements to state that if an event constitutes a hardship with respect to a participant’s spouse or dependent, it constitutes a hardship with respect to the participant, to the extent permitted under the plan.5

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