Saturday, June 13, 2009

Hardship Withdrawals and Your Responsibilities

As much as you want to help an employee who is having financial difficulty, it’s important to remember that it’s the IRS defintion of Hardship that counts, not yours. If you allow a hardship withdrawal which does not conform to the IRS definition, you run the risk of plan disqualification (monies returned and taxed).

The IRS says that there must be a heavy and immediate financial need and has provided the following non-discriminatory standards:

(1) unreimbursed medical expenses incurred by the employee, the employee’s spouse, or the employee’s dependents;

(2) purchase of principal residence (but not mortgage payments);

(3) payment of tuition and other fees for the next semester or quarter of post secondary education for the employee and dependents.

(4) payments necessary to prevent the eviction of the employee from his or her principal residence or the foreclosure of the mortgage on the
  principal residence.

(5) payment for burial or funeral expenses of the employee’s deceased parent, spouse, children, or dependents;

(6) expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction.

All outside financial resources must be exhausted including plan loans and loans from financial institutions.

There’s more, of course, but this is where plan sponsors sometimes grant a hardship withdrawal even though the IRS does not see things the same way.

If you’re not sure about a hardship request, you should consult your TPA, vendor, or ERISA counsel