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IRS Wage Levy Release - DWK Tax Group: Hardship Distributions and IRS "Safe Harbor" Rules
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Certain retirement plans may (but are not required to) allow participants to receive hardship distributions. A hardship distribution from a participant’
Contact the plan sponsor or plan administer to determine if the plan allows hardship distributions and request to see a copy of the plan document.
IRS rules provide “safe harbors” for determining if a hardship distribution is on account of an "immediate and heavy financial need":
- Expenses for medical care previously incurred by the employee, the employee’s spouse, dependents or beneficiary or is now necessary for these persons to obtain medical care;
- Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments);
- Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee, or the employee’s spouse, children, dependents or beneficiary of the employee;
- Payments necessary to prevent the eviction of the employee from the employee’s principal residence or mortgage foreclosure;
- Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary of the employee; or
- Certain damage repair expenses for the employee’s principal residence.
Under IRS rules, distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if all of the following requirements are satisfied:
The distribution is not greater than the amount of the employee’s immediate and heavy financial need (this may include any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution)
The employee has obtained all distributions, other than hardship distributions, and all nontaxable (at the time of the loan) loans currently available under all of an employer’s plans.
The terms of the plan prohibit the employee from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least six months after the hardship distribution.
Employees who take a hardship distribution cannot repay it back to the plan and in most cases are not permitted to contribute to the plan for six months after the withdrawal.
Hardship withdrawals are subject to income taxes and a 10% additional tax on early distributions.
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