If you have been following ADMIN Partners for a while, you know just how deeply we believe in providing people with education on retirement planning. As an independent TPA who specializes in plan compliance and administration, we understand that everyone from Plan Sponsors and Participants to Financial Advisors find value in retirement education. With this in mind, ADMIN’s team is starting the new blog series, ADMIN Education, dedicated to helping our community better understand the ins and outs of retirement plans. Regardless of your role or what type of plan you are familiar with, this series will expand your knowledge of retirement benefits and help you get the most from your plan.
In this two-part series we are taking a deeper look at two of the most common disbursement types from a retirement plan: financial hardships and loans. Both distribution options provide plan participants financial relief by way of an early withdrawal from their employer-sponsored retirement plan. However, the specifics around each option are different and it’s essential that Plan Sponsors and Financial Advisors understand the regulations around each to help participants make the best decision for them and their situation. Let’s start with a look at financial hardships:
WHAT IS IT?
A financial hardship distribution is a withdrawal from a participant’s retirement plan due to a specific financial need that will offset the cost necessary to satisfy the financial obligation. As intended with the name, a hardship distribution helps alleviate the burden of large or unexpected financial strains that a participant may incur. Being able to take an early withdrawal from one’s retirement account allows the individual to meet these sudden financial needs while continuing to plan for their future.
WHAT TO KNOW
The option to take a hardship withdrawal from your employer-sponsored plan is determined by the provisions set forth in the plan document. Employers can opt to allow this distribution option for their participants and can select what sources are available for withdrawal. (Previously, only employee money was allowed for withdrawal, but updated regulations in 2019 changed this. See more on the regulation updates here.)
Under IRS regulation, participants seeking a financial hardship withdrawal must be able to prove they have an immediate financial need that relates to a specific set of approved circumstances. These include medical and/or funeral expenses, costs relating to the purchase of a primary residence, payments to prevent an eviction, certain expenses relating to repairs for home damage, and tuition or educational fees for the following twelve-month period.
Participants requesting a financial hardship distribution are required to provide documentation supporting their request. The documentation should display proof of the hardship (example: tuition bills, statement of work for home repairs, etc.) along with details on the costs for each. The withdrawal from the retirement plan cannot exceed the amount of the hardship and participants do not have to repay the amount taken to their plan.
Previously, a financial hardship distribution resulted in a six-month suspension of employee deferrals to the retirement plan. Hardships also formerly required a loan option (if allowed by the Plan) to be exhausted prior to taking a hardship from the plan. However, in early 2019 the IRS updated the regulations surrounding hardship withdrawals and removed these requirements allowing participants to easily utilize the hardship option (if allowed by their Plan) and to continue saving for their future.
Stay tuned because next week we will look at loans and how a loan withdrawal differs from that of hardship distributions.