Hardship Withdrawal Requirements

[Guest Kelly Igel]

To qualify under the safe harbor definition of hardship withdrawal, an employee must first have exhausted all other available sources of money, including plan loans.

Is there, or was there ever, an exception to the above requirement (to first take a plan loan) if the hardship is being taken to purchase a principal residence?

[Jon Chambers]

Not generally (at least not under the deemed hardship rules). However, one exception might be that an employee could take a HSWD without taking a loan first, if they could demonstrate that taking a plan loan would compound the hardship. For example, a mortgage lender might say that if the participant took out a plan loan that they had to repay through payroll deduction, they wouldn't have enough remaining income to qualify for required mortgage. In this scenario, the participant could take the HSWD without taking the loan first, since taking the loan would prevent them from even qualifying to buy the house. The HSWD is then not a deemed hardship, but a hardship as determined and approved by the Committee.

[RCK]

I agree with Jon Chambers in theory, but think that it comes down to the plan document. Ours, for example, says that they have to take a loan first. So they take the smallest possible loan ($1,000) and then request the hardship.

[Jon Chambers]

RCK is correct. I was meaning to go back and make a plan document comment. My scenario only works if the document provides for both "deemed" and other HSWD.

[MWeddell]

For hardship withdrawals of 401(k) elective deferrals, the regulations require that any available nontaxable loans from the plan first be taken (subject to the comment Jon made). This is true for both the safe harbor resources test and the general resources test. It should not vary depending on the plan document.