401(k) Hardship Distributions: Frequently Asked Questions (Updated for SECURE 2.0)

A 401(k) plan is designed to help employees save for the future—but life doesn’t always go as planned. When serious financial hardship strikes—unexpected medical bills, eviction notices, or disaster losses—a hardship distribution can provide much-needed relief. It allows participants to access part of their 401(k) balance when they face an immediate and heavy financial need and have no other reasonable way to cover it. For employees, that flexibility can make an overwhelming situation more manageable.

For employers, however, hardship distributions can complicate plan administration. Each request requires documentation, verification, and careful recordkeeping to meet IRS standards. Missteps can expose a plan to compliance issues and participants to unnecessary taxes and penalties.

This FAQ explains the current 401(k) hardship distribution rules and recent changes under the SECURE 2.0 Act of 2022 (SECURE 2.0), including the new self-certification and penalty-free distribution options effective in 2024.

What is a 401(k) Hardship Distribution?

A hardship distribution allows a participant to withdraw money from their 401(k) account due to an “immediate and heavy financial need." Only the amount “necessary to satisfy” the financial need can be distributed.

Hardship withdrawals are taxable (unless from Roth basis) and cannot be rolled over or repaid. They permanently reduce the participant’s account balance.

Plans are not required to offer hardship distributions—but if they do, the plan document must define the terms and follow IRS rules.

What’s an “Immediate and Heavy Financial Need”?

401(k) plans have two options for defining an “immediate and heavy financial need:” 1) use the IRS safe harbor definition, or 2) use a custom definition. Most plans choose the safe harbor definition for administrative simplicity and audit protection. It specifies seven events that are automatically considered as an immediate and heavy financial need:

1. 1. Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.
   2. Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
   3. Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents or beneficiary.
   4. Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
   5. Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
   6. Certain expenses to repair damage to the employee’s principal residence.
   7. Expenses resulting from a FEMA-declared disaster

What’s the Amount “Necessary to Satisfy” the Financial Need?

The hardship amount must be limited to what’s needed to relieve the financial hardship, including enough to cover related taxes or penalties.

Under current IRS rules, participants are considered to have taken only the amount necessary if:

• • They have no other resources reasonably available (such as insurance, liquid assets, or loans from other plans).
  • The amount requested does not exceed the need, and
  • The participant certifies these facts in writing or electronically.

Plans may permit hardship withdrawals from a broader range of sources—including elective deferrals, QNECs, QMACs, safe-harbor contributions, and related earnings—if the plan document allows it.

Do Participants Have to Take a Loan First?

No. The IRS no longer requires participants to take all available plan loans before requesting a hardship. A plan may still include a “loan-first” rule if the sponsor prefers.

What Documentation is Necessary to Substantiate a Hardship Request?

Employers have two options to substantiate a participant’s hardship request:

• • Traditional substantiation: The participant provides supporting documentation (e.g., medical bills, tuition statements, or foreclosure notices) for review and retention.
  • Simplified self-certification (SECURE 2.0): The participant provides an electronic or written certification that:
    1. 1. A qualifying hardship event occurred,
       2. The amount requested is no more than necessary, and
       3. The participant lacks other resources to meet the need.

The plan may rely on this certification unless it has actual knowledge that contradicts it.

Regardless of method used, hardship documentation must be retained in accordance with ERISA’s documentation retention rules.

Is There Still a Deferral Suspension Requirement After a Hardship?

No. The six-month suspension rule was eliminated. Participants can continue or resume salary deferrals immediately after receiving a hardship withdrawal.

Are Hardship Distributions Taxable?

Yes. The withdrawn amount—except for any portion representing after-tax or Roth basis—is included in the participant’s gross income for the year of distribution. In addition:

• • 10% early-withdrawal penalty: If the participant is under age 59½, the distribution is generally subject to the 10% additional tax on early distributions, unless an exception applies.
  • Federal income-tax withholding: Hardship distributions are not eligible for rollover, so they are treated as non-periodic payments for withholding purposes.
    • 10% withholding applies unless the participant elects no withholding on Form W-4R (or equivalent electronic election).
    • Unlike rollover-eligible distributions, the 20% mandatory withholding rule does not apply.
    • Participants may request a higher withholding rate if desired.
  • State income-tax withholding: State rules vary. Some states require mandatory withholding; others allow participants to opt out.
  • Reporting: The gross amount and taxable portion of the hardship distribution are reported on Form 1099-R for the year paid.

What Hardship-Related Options Did SECURE 2.0 Add?

SECURE 2.0 didn’t change the basic hardship rules but introduced three new optional distribution types that let participants access retirement funds during emergencies or other extraordinary circumstances. These withdrawals are not hardship distributions, but they serve a similar purpose - short-term relief.

Emergency Personal Expense Distribution (EPED)

• • Purpose: Provides quick access to funds for unforeseen personal or family emergencies, such as urgent medical bills, home repairs, or car expenses.
  • Limits: Participants may withdraw up to $1,000 once per calendar year (or their vested account balance if less). No additional EPED may be taken during the following three years unless the prior amount is repaid or new contributions exceed it.
  • Effective Date: Applies to plan years beginning on or after 2024.

Domestic Abuse Victim Distribution

• • Purpose: Gives financial flexibility to participants who experienced domestic abuse by a spouse or domestic partner within the previous 12 months.
  • Limits: Participants may withdraw the lesser of $10,000 (indexed) or 50 % of their vested account balance.
  • Effective Date: Available for distributions made after December 31, 2023.

Qualified Disaster Recovery Distribution (QDRD)

• • Purpose: Provides relief for participants who suffer economic loss from a federally declared major disaster.
  • Limits: Participants whose principal residence was in the disaster area may withdraw up to $22,000 per disaster.
  • Effective Date: Applies permanently beginning in 2023 for disasters declared after December 27, 2020.

Features of the SECURE 2.0 Distributions

All three special distributions share the following features:

• • Optional for plans: Employers decide whether to offer them. Adoption requires a plan amendment.
  • Self-certification: Participants confirm eligibility; no documentation is required unless the plan has actual knowledge otherwise.
  • Penalty-free: The 10 % early-withdrawal penalty does not apply, even for participants under 59½.
  • Taxable but repayable: Amounts are included in taxable income when withdrawn but may be repaid within three years to a plan or IRA.
  • Withholding: Subject to the same rules as hardship distributions.

401(k) Hardships are Manageable with the Right Help!

Both employers and employees should understand their plan’s hardship-distribution rules. At first glance, the process can seem complex—but with proper guidance, it’s manageable. Participants simply need to meet two criteria: demonstrate an immediate and heavy financial need and withdraw only the amount necessary to satisfy it.

If questions arise, ask your 401(k) provider. An experienced provider—like Employee Fiduciary—can offer straightforward guidance and ensure your plan’s hardship withdrawals stay compliant and efficient.