How to get approved for hardship withdrawal?

To get approved for a hardship withdrawal from your retirement plan, such as a 401(k), you must demonstrate a severe and immediate financial need that cannot be met through any other available resources.

Eligibility Criteria for Hardship Withdrawals

Approval for a hardship withdrawal hinges on meeting specific Internal Revenue Service (IRS) criteria, which generally require both an immediate and heavy financial need and the absence of other reasonably available funds.

1. Immediate and Heavy Financial Need

Your financial situation must represent an urgent and substantial necessity. The IRS provides a "safe harbor" list of events that are generally considered immediate and heavy financial needs. These often include:

• Medical Care Expenses: Costs incurred for medical care that would be deductible under IRS rules for yourself, your spouse, dependents, or a primary beneficiary.
• Costs Relating to the Purchase of a Principal Residence: Expenses directly associated with buying your main home (excluding mortgage payments).
• Tuition and Related Educational Fees and Room and Board Expenses: For the next 12 months of post-secondary education for yourself, your spouse, dependents, or a primary beneficiary.
• Payments Necessary to Prevent Eviction or Foreclosure: On your principal residence.
• Burial or Funeral Expenses: For your deceased parent, spouse, dependents, or a primary beneficiary.
• Expenses for the Repair of Damage to Your Principal Residence: That would qualify for a casualty deduction under IRS rules (regardless of whether you itemize deductions).
• Expenses and Losses Due to a Federally Declared Disaster: For a participant residing in an area designated by FEMA for individual assistance.

2. Lack of Other Reasonably Available Resources

A critical component of approval is proving that the financial need cannot be satisfied from other sources. This means that you must not have other liquid investments, savings, or other distributions you are eligible to take from your 401(k) plan that could cover the expense. Your plan administrator will require you to confirm that you have exhausted all other financial avenues, including:

• Other personal savings accounts
• Investments that could be liquidated
• Other available loans (e.g., bank loans, other retirement plan loans)
• Insurance proceeds

The Application Process

While specific steps can vary by plan administrator, the general process for applying for a hardship withdrawal typically involves:

1. Understand Your Plan's Rules: Each 401(k) plan has its own specific rules and procedures for hardship withdrawals, which must align with IRS guidelines. Contact your plan administrator or HR department to obtain the necessary forms and understand their specific requirements.
2. Determine Eligibility: Verify that your reason for withdrawal falls within the IRS's qualified hardship events and that you meet the "immediate and heavy financial need" and "no other resources" criteria.
3. Gather Documentation: You will need to provide proof of the hardship event and the associated expenses. This might include:
   • Medical bills or statements
   • Purchase agreements for a home
   • Eviction notices or foreclosure letters
   • Funeral home invoices
   • Tuition invoices
   • Repair estimates or invoices for home damage
   • A signed statement confirming you have no other means to meet the financial need.
4. Complete the Application Form: Fill out all required sections accurately and completely.
5. Submit Your Application: Send the completed form and all supporting documentation to your plan administrator or designated third-party administrator (TPA).
6. Await Approval: Your plan administrator will review your application and documentation to determine if it meets the eligibility criteria. They may contact you for additional information or clarification.

Important Considerations

Before applying, be aware of the implications of a hardship withdrawal:

• Taxable Income: Hardship withdrawals are generally considered taxable income in the year they are received and may be subject to your ordinary income tax rate.
• Early Withdrawal Penalty: If you are under age 59½, the withdrawal is typically subject to an additional 10% early withdrawal penalty, unless an exception applies (e.g., unreimbursed medical expenses exceeding 7.5% of adjusted gross income, certain disability situations).
• No Repayment Required (or Permitted): Unlike a 401(k) loan, hardship withdrawals are not repaid to your retirement account. This means the money is permanently removed from your retirement savings.
• Contribution Suspension: Some plans may require you to suspend contributions to your 401(k) for six months after a hardship withdrawal, though this rule was eliminated for most plans by the SECURE Act. Verify your plan's current policy.
• Impact on Retirement Savings: A hardship withdrawal significantly reduces your retirement nest egg, potentially impacting your long-term financial security. It also means you miss out on potential investment growth on the withdrawn amount.