Employers and their workers have been devastated by government-mandated business restrictions enforced in response to the global COVID-19 pandemic. As consumer activity has plummeted due to restricted business hours (or closures) and shelter-in-place orders, business owners have struggled to keep their companies afloat. You may be facing the same hardship, looking for financial support during this time both for your business and the wellbeing of your employees. Your next best option is a hardship withdrawal from your 401K plan. To learn more about this option for improving the financial security of your business despite the ongoing pandemic, review the information below as provided by 401K plan provider, Ubiquity.
What is a Hardship Withdrawal?
A 401K hardship withdrawal is surrounded by differing opinions that either focus on the potential drawbacks and risks or highlight the advantages, especially in difficult times such as this. This type of withdrawal from your 401K should only be done in emergencies, as it is the removal of funds from your retirement plans. The Internal Revenue Service (IRS) only deems this withdrawal permanent in times of “immediate and heavy financial need.” Your plan administrator is the one who decides on whether you are allowed to make the withdrawal or not.
Employers considering this option for their businesses are advised to have employees present evidence of hardship before committing to the decision. Though this withdrawal is not subject to the same fees as other 401K loans and removal of funds, it should never be considered as an initial fallback. For this reason, you must ensure that all your employees are genuinely in need of such assistance at the time. If you’re considering a hardship withdrawal, follow the IRS guidelines below to confirm your decision and eligibility:
- Review your plan and confirm whether such a withdrawal is allowed.
- Review the procedures required of your employees to request a hardship distribution.
- Learn your specific plan’s definition of “hardship.”
- Be aware of your plan’s limits on the types of funds (and their amounts) to be distributed via a hardship withdrawal.
Keep in mind that hardship withdrawals are not allowed to be paid back into the account as a typical 401K plan loan would be. However, you will be able to continue contributing. Employees will also not be subject to paying the standard 10% early withdrawal penalty, whether they are younger than 59.5 years old or not. (Although there are exceptions to this, depending on how the money is used).
Your Options for a Hardship Withdrawal
There are a few different options to choose from when considering a 401K hardship withdrawal. Each option can help your employees pay for medical costs, emergency home repair, rental payments to avoid eviction, expenses for burying loved ones lost to the coronavirus, and losses as a result of the “federally-declared disaster.” Most 401K plans have now incorporated changes from the CARES Act, namely, doubling the limit of loans that can be taken out of the 401K. Loan repayment periods can be extended, and the required age limit has now been relaxed.
Review the options that would be best for you and your employees during this time. By choosing to make a 401K hardship withdrawal, you will ensure that you all make it out to the other side of the pandemic with financial security and a readiness to return to work.
