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Withholding on hardship distributions
(Posted June 1, 1999)
Question 39: If a plan allows for hardship distributions from all available accounts, is there a required 10% withholding on employer contribution accounts?
Answer: Required withholding (which is 20% rather than 10%) does not apply to hardship distributions from 401(k) elective deferral accounts, because those are excepted from the definition of eligible rollover distributions. However, if the hardship distribution comes from a different type of plan, or from a different account within a 401(k) plan, 20% withholding applies unless the participant does a direct rollover of the hardship distribution to an IRA.
This topic is covered in Chapter 3D of The Retirement Plan Distribution Book.
An alert reader has added the following helpful clarification regarding mandatory and elective withholding:
in your latest response to a "Retirement Plan Distributions" questions regarding tax withholding and hardship withdrawals, it is possible for someone to infer that there is no withholding requirement for salary deferrals withdrawn for hardship. The questioner appears to be mixing the 10% "voluntary" withholding requirement on non-periodic distributions that are not eligible for rollover and the 20% mandatory withholding on eligible rollover distributions. For clarity, your answer should probably mention that the salary deferral will be subject to the 10% withholding requirement unless the participant opts out. It might also help folks to point out that two different withholding requirements apply where both salary deferral and other employer $$ are withdrawn for hardship at the same time.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice
to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the
law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness
or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.)
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