IRS: Surrogate Mother, Unborn Child Expenses Not Eligible for K Plan Hardship Withdrawl

January 14, 2005 ( - The Internal Revenue Service (IRS) has said that medical expenses incurred in connection with a surrogate mother and an unborn child generally do not qualify for a medical-care hardship exception to the 10% penalty on early withdrawals from a 401(k) account.

>According to an  IRS Information Letter , a 401(k) plan may make a hardship distribution if the distribution is made on account of an immediate and heavy financial need of the participant; the withdrawal is usually subject to a 10% additional tax (beyond the normal taxation on withdrawal). One exception is for medical care expenses under Code Section 213.  

>Under Section 213, taxpayers are usually allowed to deduct expenses paid during the year for medical care of the participant and the participant’s spouse or dependent. Using this as a basis for its ruling, the IRS stated that since a surrogate mother and unborn child are not a participant’s spouse or dependent (an unborn child cannot be a dependent), they generally are not eligible for the deduction.