RPF M3 U4 Hardship Withdrawals Flashcards
Study (22 cards)
What is a hardship withdrawal?
A withdrawal due to an immediate and heavy financial need that is necessary to satisfy that financial need.
What is the events test?
The test to determine whether a participant in a 401(k) plan has an immediate and heavy financial need as applicable to hardship withdrawals.
What is the needs test?
The test to determine the amount necessary to satisfy financial needs, as applicable to 401(k) hardship withdrawals.
What is the safe harbor standard?
Pre-approved IRS language using specifically named hardship events and stipulated additional procedures for hardship withdrawals.
How might a plan define a hardship event?
Plans must define which events qualify as hardships and provide objective criteria for determination.
How is the amount a participant can withdraw for a hardship determined?
The amount must not exceed the financial need and may be adjusted for taxes and penalties.
What forms of payment are available for hardship withdrawals?
Hardship payments are provided as a lump sum and may not be paid out as annuities.
Are hardship withdrawals subject to tax reporting and withholding?
Yes, hardship distributions are taxable income and subject to a 10% federal withholding unless waived.
What are the two tests for hardship distributions?
- The hardship must be made on account of an immediate and heavy financial need (events test). 2. A distribution must be necessary to satisfy the financial need (needs test).
What are the seven predefined hardship expenses under the safe harbor standard?
- Medical care not covered by insurance. 2. Purchase of principal residence. 3. Tuition and educational fees for the next 12 months. 4. Payments to prevent eviction. 5. Burial or funeral expenses. 6. Repair of damage to principal residence. 7. Expenses due to federally declared disaster.
What conditions must be met for the needs test?
- The amount of the distribution does not exceed the financial need. 2. Other distributions must be taken first.
What are common restrictions on hardship distributions?
- Limiting participants to one hardship per calendar year. 2. Restricting hardships to certain sources. 3. Minimum amount restrictions. 4. Requiring 100% vesting.
What sources are never allowed for hardship distributions?
Money purchase sources that were transferred into a 401(k) plan are never available for hardship.
What happens if a hardship distribution is taken from a Roth source?
The amount contributed and the amount subject to a qualified Roth distribution will not be taxable.
What must a participant do to request a hardship withdrawal?
The participant must fill out a form and consent to the hardship request.
What is the default federal withholding amount for hardship distributions?
The default is a 10% federal withholding amount, which may be waived or increased by the participant.
What is the significance of the SECURE 2.0 Act regarding hardship withdrawals?
Plan administrators may rely on representations made by the employee regarding the hardship unless they have knowledge to the contrary.
What is a hardship event according to a plan?
A hardship event is defined by the plan and may adopt the safe harbor standard, allowing withdrawals for specific situations such as medical care, purchase of a principal residence, tuition payments, preventing eviction, funeral expenses, losses due to a federally declared disaster, or repair of damage to the principal residence.
How is the amount a participant can withdraw for a hardship determined?
The withdrawal amount cannot exceed the financial need and is limited by available sources. Money purchase sources transferred into the plan are never available for withdrawal.
What forms of payment are available for hardship withdrawals?
Hardship withdrawals are only paid out as lump sums and cannot be rolled over.
How are hardship withdrawals taxed and are they subject to withholding?
Hardship withdrawals are reported as taxable income, with a 20% federal withholding reduced to 10%. Participants under age 59½ incur a 10% additional penalty for early withdrawal.
Where can I find more information on hardship withdrawals?
For more information, see the IRS website on Retirement Topics - Hardship Distributions.
