Hardship Withdrawal - Can this be done without directly involving my employer?

[ufo9]

Hardship Withdrawal - Can this be done without directly involving my employer? 

I'm in immediate need for hardship withdrawal, I can also go with a loan, but I incline towards withdrawal, as with a loan, I will have to pay it immediately if my employer will let me go for any reason.

How does this process work? Who do I send documentation to? Will my employer be notified / examine my documentation, or are there protection laws where I don't have to fully disclose the situation?

Thanks!

[Lou S.]

Assuming your Plan allows for Hardship, the answer is - it depends. The Plan Administrator under ERISA, named in the Plan documents and listed in your SPD will need to review and approve your hardship withdrawal, including any supporting documentation they require  to substantiate the withdrawal. In most smaller plans, the Plan Administrator is often your Employer. If the Hardship is for medical reasons, HIPPA rules will generally limit the amount you need to disclose.

You want to start with your benefits department to ask the right questions.

This also being 2020, if your request in anyway remotely related to COVID-19 you might want to ask them if the Plan is allowing "CARES Act distributions for COVID-19" and if so what is their self certification process which would eliminate the need for much of the documentation that might be required for an ordinary hardship withdrawal request.

[QDROphile]

A hardship withdrawal relates to the plan and not the employer.  That said, plans vary in visibility to the employer of plan activity.  Employers are not legally allowed to take adverse action toward an employee because of exercise of the exercise of rights under the plan, such s taking a hardship distribution.  That is an abstract legal proposition that may not be true in practice.

You were informed how to interact with the plan and your account.  It may be that you directly contact a service provider, such as an insurance company or an investment company (e.g. Fidelity, Vanguard, T.Rowe Price) or another type of administrative services plan, or someone at the employer, typically in HR.  If you are clueless, then ask some HR representative how you can connect with your account.  You may be referred to information materials that explain it to you, or you may be given a direct answer, such as a name and phone number or a website.

You will be asked about the reason for the withdrawal and the amount needed to assure compliance with the hardship withdrawal rules.  As mentioned above, your employer may be privy to the information, or not.

I am offering no comment on your thinking about loan vs. hardship.  You should rethink, preferably with the aid of a plan representative, if that is available.  Generally, hardship withdrawal is a last resort (at least in the view of professionals n the industry) and you may not understand the effects of a loan, even facing the prospect of losing your job, and defaulting on the loan.  It is probably no worse than the consequences of a hardship distribution.  Some plans do not allow hardship withdrawals if a loan is available to cover the need. 

[BG5150]

If your employer lets you go, you don't HAVE to pay back a loan.  Any outstanding amount will become taxable income to you.

The hardship withdrawal is also taxable income to you.

[ratherbereading]

It depends as others have said. The TPA for whom I work, mandates the plan sponsor (i.e. the employer) approve online, or sign off on all distributions, no matter what they are.  They have to make sure the hardship distribution is in line with the plan document.  Not sure why it would be a big deal for them to know.

[BG5150]

1 hour ago, ratherbereading said:

It depends as others have said. The TPA for whom I work, mandates the plan sponsor (i.e. the employer) approve online, or sign off on all distributions, no matter what they are.  They have to make sure the hardship distribution is in line with the plan document.  Not sure why it would be a big deal for them to know.

I'm not sure if I'd want my employer to know I'm being kicked out of my house or that I'm being treated by the community psychiatric hospital.  People do talk even though they shouldn't.

(This is not to say that the OP is in any of these situations)

[Patricia Neal Jensen]

All the above is good advice.  I would emphasize  that a Hardship withdrawal has immediate and negative  tax consequences (again ignoring the COVID19 rules).  You will be taxed and penalized for the amount  of the Hardship and in some states you will also pay a state penalty in addition to the state tax and the federal tax and penalty.

I often tell Participants who ask, that they will "lose" around 60% of the amount to taxes and penalties in a Hardship withdrawal situation.

Loans are much better.  You would normally not have to give a reason for a loan (some plans require this but not all) and it is not taxable when you take the money out of the plan.  You will only pay taxes and penalties if you default.

IRS.gov/newsroom/relief- for- taxpayers-affected-by-Covid-19-who -take-distributions-or-loans-from retirement- plans will take you to an IRS News site that has fairly readable information on such distributions if they relate to the application of the new Covid19 rules.   It will help you understand what we are referencing and may make a good copy to take with you when you talk to your HR person.

The best of luck to you.

[Luke Bailey]

ufo9, if you or anyone in your household has suffered a reduction in income or lost work because of COVID-19, I strongly recommend that you follow Lou S.'s suggestion and Google "CARES distributions." See if you think you qualify and then ask your employer if one is available for you from the plan.

[BG5150]

16 hours ago, Patricia Neal Jensen said:

I often tell Participants who ask, that they will "lose" around 60% of the amount to taxes and penalties in a Hardship withdrawal situation.

I would think that depends on what tax bracket someone is in.  I'm not comfortable giving that sore of tax adice.