Because we know that many people are feeling the financial stress that comes with this economic downturn, it’s not surprising to read in a recent report from Mercer that the percentage of 401(k) plan participants who took a hardship withdrawal out of their account increased 21 percent for the first 6 months of 2008 compared with the same period in 2007. But given this figure employers should be thinking about these figures and anticipating such requests within their own companies.
The IRS allows hardship withdrawals, but this does not mean that employers should automatically grant every request. It’s crucial that employers understand the conditions set by the IRS for withdrawals, and that you check with your 401(k) plan to understand their policies toward withdrawals.The IRS says that hardship withdrawals can be taken from 401(k) plans for “immediate and heavy financial need.” IRS examples of this need include:
- Extraordinary medical expenses for an employee or their dependents.
- Expenses related to the purchase of a home, but not mortgage payments.
- Expenses for up to a year of post-secondary education.
- Expenses to prevent eviction or foreclosure.
- Provided written documentation of the hardship.
- Exhausted all other available assets, like a plan loan or do they own a second home which could be sold to prevent foreclosure.