What Qualifies as an ‘Immediate and Heavy Financial Need’ Under Hardship Withdrawal Rules?

“Do the Experts have a list of the types of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need for our 403(b) plan under the hardship withdrawal rules? I have read different sources that list different expense types.”

 Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Certainly! By way of background, hardship distributions from a 403(b) plan are subject to the 401(k) rules on hardship distributions. Under the 401(k) rules, hardship distributions are permitted when an employee has an “immediate and heavy financial need” and the distribution is necessary to satisfy the financial need. The regulations identify seven types of expense categories that may constitute an immediate and heavy financial need:

1) Expenses for (or necessary to obtain) medical care that would be deductible under Internal Revenue Code Section 213(d), determined without regard to the limitations in IRC Section 213(a) (relating to the applicable percentage of adjusted gross income and the recipients of the medical care) provided that, if the recipient of the medical care is not listed in IRC Section 213(a), the recipient is a primary beneficiary under the plan;

2) Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);

3) Payment of tuition, related educational fees and room and board expenses, for up to the next 12 months of post-secondary education for the employee, the employee’s spouse, child or dependent (as defined in IRC Section 152 without regard to IRC Section 152(b)(1), (b)(2) and (d)(1)(B)) or a primary beneficiary under the plan;

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) Payments for burial or funeral expenses for the employee’s deceased parent, spouse, child or dependent (as defined in IRC Section 152 without regard to IRC Section 152(d)(1)(B)), or for a deceased primary beneficiary under the plan;

(6) Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC Section 165 (determined without regard to Section 165(h)(5) and whether the loss exceeds 10% of adjusted gross income); and

(7) Expenses and losses (including loss of income) incurred by the employee on account of a disaster declared by the Federal Emergency Management Agency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, Public Law 100-707, provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster.

Note that the items on this list reflect the current regulations effective as of September 23, 2019. However, the regulations have evolved over time, which may explain why you saw different language depending on the source you reviewed.

That said, your particular list of expenses does not need to include all the expenses on this list in order to satisfy the safe harbor, as discussed in a prior Ask the Experts column. Thus, you should check your 403(b) plan document to confirm which expense categories above are utilized in your particular plan.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice. 

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