Hardship Rules Per IRS Rules
While each plan administrator is allowed to determine for themselves what the 401k hardship rule guidelines are for the individual plans, the Internal Revenue Service requires that specific criteria be met for those who are interested in drawing from their 401K. 401k hardship withdrawal that do not meet the basic criteria may be subjected to withdrawal penalties in addition to tax withholding. Here are some of the basic 401k hardship withdrawal rules that are imposed by the IRS.
Defining hardship - The IRS states that in order for a withdrawal to be considered a hardship, the funds that are needed must be to fill an immediate financial need. This means that sudden issues such as buying a new home, home foreclosure, past due rental expenses that may result in eviction, continuing education costs and funeral expenses (among others) would define a hardship. Wanting to purchase a second home, a television or a car would unlikely be considered appropriate for a hardship withdrawal;
Additional resources - The IRS further states that if a hardship withdrawal is allowed then the person withdrawing may be required to prove that they did not have alternate resources available to them. Alternate resources may include certificates of deposit that are not in IRA accounts, savings accounts, second homes without mortgages and even insurance settlements. These need not belong to the 401(k) holder, but may also belong to a spouse or dependent child.
There are other classifications that the Internal Revenue Service may review as part of a hardship withdrawal. Plans that offer withdrawals may also be restricted on the amounts that may be withdrawn as well as the source of the funds to be withdrawn. Anyone who is considering a 401k withdrawal option must not only understand the plan limitations, but should also be aware of the IRS 401k hardship rule.