Do 403(b) plans permit withdrawals for financial hardship?
Plan sponsors have the option of permitting withdrawals for financial hardship (i.e., it is not required that plan sponsors permit withdrawals for financial hardship). A hardship distribution (or hardship “withdrawal”) from a participant’s account can be made only if the distribution is due to an immediate and heavy financial need, and the distribution is not in excess of an amount necessary to satisfy that financial need. Plans may continue to restrict the types of contributions available for hardship distributions and whether earnings on those contributions are included. Safe harbor employer contributions (whether matching or nonelective) may be distributed upon hardship. Also, Qualified Non-elective Contributions and Qualified Matching Contributions (and earnings) may be distributed from a 403(b) annuity but not from a 403(b)(7) custodial account. Hardship distributions can be made only from accumulated participant contributions, not from earnings on contributions.
Documentation is required for a hardship distribution. Employees who take a hardship distribution cannot repay it to the plan.
Hardship withdrawals are subject to income taxes and, if the participant is under age 59½, a 10% federal tax penalty on early distributions may apply.
Approving a hardship withdrawal without adequate documentation can cause compliance issues for a plan. Our services include the review and approval of hardship withdrawals to ensure they meet IRS requirements.
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