What You Should Know About the Hardship Withdrawal Process

In these difficult economic times, more participants are looking into the option of taking a hardship withdrawal.  A participant can only take a hardship withdrawal if it is permitted by the plan and if he (or in some cases his spouse, dependent, or beneficiary) has an immediate and heavy financial need.  The amount of the hardship is limited to the amount necessary to meet the need.

 

The following checklist can be used when faced with the task of reviewing and approving hardship requests:

  • Make sure that hardships are allowed by your plan document and review the plan requirements to determine what procedures the employee must follow as well as any limits on the amounts and types of funds that may be withdrawn.
  • Verify the hardship reason specified by the participant is an allowable reason for your plan.
  • Ensure the participant has completed the proper plan paperwork and provided the proper supporting documentation for his request.
  • Before taking a hardship withdrawal, the participant must first take any loans or other distributions available under the plan or any other employer plans.  Verify that this requirement has been met.
  • Check the amount requested does not exceed the amount of the need.  The amount of the need may include any taxes or penalties that are due because of the hardship.
  • Verify the amount of the hardship request does not exceed any limits that the plan may place on hardships.  For example, hardships are often limited to the salary deferral contributions only.  Also, some plans impose a minimum request amount to limit very small withdrawals and keep down administrative costs.
  • Finally, most plans specify that after taking a hardship a participant must be suspended from making salary deferral contributions to this plan and all other plans that the employer maintains for at least six months.  Inform the employee about this rule and stop his salary deferrals.
author

Laura Lyvers joined RMS as an Account Executive in January, 2008. She is a 1985 graduate of Bellarmine University with a Bachelor of Arts in Accounting. Laura is a Certified Public Accountant and a Qualified 401(k) Administrator. She started her career in public accounting at a local firm focusing on physician practices and their retirement plans. She then moved to Benefit Actuaries, where she was an Account Executive, and then to ADP Retirement Services as Director of Operations. Laura has over 30 years of experience working with the various aspects of defined contribution plans, including plan design, consulting, compliance testing and plan administration for plans of all sizes. She is a member of the Louisville Employee Benefits Council, the Kentucky Society of CPAs and the American Society of Pension Professionals & Actuaries, and holds the Employee Stock Ownership Plan Administration certificate through ASPPA. Laura heads up the RMS 403(b) Practice Group and is a member of the RMS ESOP and Prevailing Wage Practice Groups. Laura devotes most of her time to ESOP and defined contribution plan administration and consulting.

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