Can a terminated employee take a hardship withdrawal instead of cashing out their balance? Wants to use to purchase a residence. What is taxable and what has to be withheld?

If the participant is eligible for a cashout, what is the advantage of taking a hardship instead?

The hardship amount is about 80% of the available balance. The question is whether they can lower the tax liability? Is there an advantage to rollover to an IRA and then take a partial distribution?

Qualified first-time homebuyers may withdraw penalty-free (from the 10% excise tax) from IRAs, up to a $10,000 lifetime limit. This exception is not available for hardship distributions from qualified retirement plans. I am not familiar with any timing requirements that may apply to rollovers and subsequent IRA withdrawals.

The participant should get qualified and compentent advice with respect to whether or not they qualify for this exception.

What does the plan say? You may find that the hardship withdrawal provisons are written to apply to someone who is employed by the plan sponsor. After termination of employment, they do not apply.

I have had this come up recently. A terminated participant wants a hardship. The plan doc(Corbel) does not differentiate between active and terminated. It just says "participants". A terminated participant is a participant. I'm thinking the hardship could be issued. To throw another argument into the topic, what if the term participant is participating in another plans 401k? Would they suspend the participant for 6 months?

What does the document say about timing of distributions for terminated participants? Ours require distribution immediately, which makes the hardship question a mute point.

What section/subsection of the document is the hardship language in? Is called "distributions" or "in-service distributions"? Does the hardship section of the document use the word participant or employee (and is employee defined in the plan)? I presume your plan is all or nothing on terminated distributions (ie lump sum only, no partial or as needed); the plan doesn't state in some other section that a term'd participant only gets a specific list of distribution options? I've never had a plan that allowed term'd hardships but I don't see why it couldn't be possible.


This I know the answer to... the regs say the plan or other plan of the employer. So if the plans are unrelated then you have no issue.

And, K2, how can you require a terminated participant to take a distribution if the individual will not give consent and has not reached NRA (assuming that the accured benefit exceeds $5,000)? (IRC Section 411(a)(11)(A) & Treas. Reg. Section 1.411(a)-11(b).)

It is only required if below $5,000 -- and most of ours are below that amount. Once terminated, we only allow lump sums, effectively eliminating taking a hardship and leaving the rest in the plan.