Hardship Withdrawals

The IRC imposes limitations and possible tax penalties on in-service distributions from 403(b) retirement plans. However, distributions of certain 403(b) accumulations may be permitted when required to meet the financial burden of a qualifying hardship of participants and their dependents. Qualifying hardships include medical and tuition expenses, purchase of a primary residence, payments for funeral expenses, expenses relating to major natural catastrophes, and prevention of eviction/foreclosure. These withdrawals are subject to income tax, as well as possible early withdrawal penalties.

Prior to the issuance of the final 403(b) regulations, there was no clear guidance on administration of hardship distributions for 403(b) plans. The final regulations apply the same rules for hardship withdrawals from 403(b) plans as those governing hardship distributions from 401(k) plans.

Under the 401(k) guidance for hardship distributions, before taking a hardship withdrawal, the participant may be required to first obtain all loans and distributions available under all plans of the employer. If those amounts do not meet the participant’s needs, then he or she can take a hardship withdrawal.

The final regulations also make it clear that the hardship determination is the employer’s ultimate responsibility, and that it will be inappropriate for the employer to allocate responsibility for determining eligibility for hardship distributions to participants, as they lack the necessary expertise and objectivity. You will need to review your current practice for determining hardship and possibly adopt new administrative procedures, which may include allocating safe harbor hardship determination to a third party.

Next:  Administration of Requests for Hardship Withdrawals From Non-ERISA TDA Plans >

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017