Hardship withdrawals

[Guest LSULLIVAN]

Can a terminated employee request a hardship? If so, can this be used to pay for medical insurance?

[Guest Pensions in Paradise]

Since the employee has terminated employment, why can't he/she just take a "normal" distribution?

[Guest LSULLIVAN]

My only guess would be to bypass penalties.

[JDuns]

The answer is "it depends on the Plan". There is nothing that requires a plan to offer hardship distributions at all. If a plan chooses to allow hardship distributions, it can limit availability to active employees.

If a person wanted to avoid the penalties, they could roll-over the excess over the hardship into an IRA and avoid the penalties.

[Guest mjb]

What penalties are avoided by hardship distribution? Only exeption is from 20% withholding but ee still has to pay estimated tax on distribution plus 10% penalty tax.

[Guest LSULLIVAN]

I stand to be corrected about the penalties. But arent there a couple of reasons that would waive the penalty? One being something like if medical bills exceeded a % of employees income.

[saabraa]

Most plans use the safe harbor definition of hardship. Expenses for medical care is one of the 4 safe harbor reasons. It's a stretch to say medical insurance is for the care of the employee.

Hardship distributions can't be rolled over. That's why they're exempt from 20% withholding.

Excepting amount needed to pay taxes, there can't be any distribution of an amount in excess of the hardship.

Hardship can avoid 10% early distribution tax to the extent:

Potentially deductible medical expenses exceed 7 1/2% of adjusted gross income (regardless of whether med expenses are actually deducted on Schedule A),

The distribution is used to acquire principal residence

[GBurns]

For most people the primary expense of medical care is health insurance premiums.

See IRC section 213(d)(1)(D):

(d) Definitions

For purposes of this section—

(1) The term “medical care” means amounts paid—

(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,

(B) for transportation primarily for and essential to medical care referred to in subparagraph (A),

© for qualified long-term care services (as defined in section 7702B ©), or

(D) for insurance (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged) covering medical care referred to in subparagraphs (A) and (B) or for any qualified long-term care insurance contract (as defined in section 7702B (b)).

In the case of a qualified long-term care insurance contract (as defined in section 7702B (b)), only eligible long-term care premiums (as defined in paragraph (10)) shall be taken into account under subparagraph (D).

[saabraa]

I stand corrected on that point. When I actually referred to the 401k regs, they do cite 213(d) as the definer of medical expenses.