Due to economic conditions, many taxpayers are taking hardship distributions.  There are issues that arise during this circumstance. A retirement plan may, but is not required to, provide for hardship distributions.  If a 401(k) plan allows for this type of distibution it must provide specific criteria to make the determination of hardship and the IRS has very specific standards.  But what weighs the most with taxpayers is - what are the tax consequences of taking a hardship distribution.

 

The bottom line is this:  once you receive a distribution that you have had classified as hardship you generally will be prohibited from making elective contributions to the plan for at least six months (Reg. 1.401(k)-1(d)(3)(iv)(E)(2)).

 

They are also included in gross income unless they consist of ROTH contributions. In addition, they may be subject to an additional tax for early distributions. 

 

A hardship distribution cannot be re-paid to the plan like a loan.

 

A hardship distribution cannot be rolled over into an IRS or other qualified plan.

 

Be careful when making a decision to elect a distribution as a hardship.