Expanded Hardship Withdrawal Rules for 401K Plans

The expanded hardship withdrawals are something that is very new to the world of retirement plans. The concept of these withdrawals was introduced in the Pension Protection Act (PPA) of 2006, which was the latest major pension plan reform enacted by the United States Congress.

When you take a typical hardship withdrawal from your retirement program, the money can only be used to satisfy a hardship need that is related directly to you, as the account holder, your spouse, and/or your dependents. If you need a hardship withdrawal to help out your siblings, parents, or anyone else close to you, tough luck, you can’t touch it.

The expanded hardship withdrawals are where this all changes. These new provision will allow hardship withdrawals to be extended to your beneficiaries regardless of whether your beneficiaries are your spouse and/or dependents or not. You can list your aunt, uncle, brother, sister, mother, father, or your best friend. It doesn’t matter. If they are your beneficiary, you can take a hardship withdrawal to help them out.

NOTE: One very important point I’d like to make regarding this. Your plan (employer) must adopt these expanded hardship rules. If your plan has not adopted them, they do not apply to you. In other words, this new law is discretionary and an employer is not required to adopt the provisions. Always check with your benefits office to see if it is offered, or to indicate your interest that they do offer it in the future.

For example, if you have a domestic partner who who must undergo medical procedures, you would not be able to take a hardship withdrawal for that person under the standard hardship rules. Under the expanded rules, as long as that domestic partner is a named beneficiary on your employer plan, a hardship withdrawal can be taken to cover those expenses.

The chances are good that your employer does not yet offer this new provision; many plans don’t. Expanded hardships are gaining momentum, however, and it may not be long until most plans that allow hardship withdrawals will also allow the expanded features. As I mentioned above in my note, if your plan does not offer this and you would like to see it, just say something. Many employers are very responsive to the needs and desires of their plan participants and are willing to make changes if there is a demand for it.