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Why You Should Consider 401K Hardship Withdrawals During the Coronavirus Crisis

by Byrne Anderson
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Small business owners have been hit incredibly hard during this pandemic. Amid government mandates requiring all non-essential businesses to close their doors, there have been drastic changes in operations across all industries. Business hours have been severely reduced, companies are down to skeleton staff, and some have had to shut down business entirely. Many require financial assistance at this time. One option that is available to you is the 401K hardship withdrawal. Here’s what you need to know about this type of loan and how it may help keep your business afloat.

Understanding What a Hardship Withdrawal Is

Both economists and small business owners have starkly contrasting opinions on the reliability and appropriateness of the 401K hardship withdrawal. The ongoing agreement is partially justified by the fact that the 401K withdrawal should only be taken out in emergency circumstances. Why? When you take out this type of loan, you are drawing straight from your retirement funds. Since building a substantial retirement savings takes several years to accomplish, this is not a decision you should take lightly.

According to the Internal Revenue Service (IRS), this withdrawal is justifiable only in times of “immediate and heavy financial need.” Although the decision to follow through with a 401K withdrawal is yours, your 401K plan administrator has the last say on whether you can finalize this borrowing.

Should You Take Out a 401K Hardship Withdrawal?

If you are considering this option to sustain your business for the duration of this pandemic, it is strongly advised that you have your employees provide proof of hardship. This way, you can have hard documentation that gives justification to follow through with the withdrawal when discussing this option with your plan administrator. The 401K should only be used as a last resort, which is why you must provide ample documentation that demonstrates your business’s need for financial assistance.

The IRS is, fortunately, broadening criteria for withdrawals, so be sure to review your plan and confirm your eligibility before discussing this option with your administrator.

The funds can be used to help you and your employees:

  • Medical expenses
  • Emergency home repairs
  • Rent payments
  • Burial and funeral expenses

 Most 401K plans have been slightly altered to accommodate changes from the CARES Act. For example, the limit on borrowing 401K loans has been doubled for many plans. Payment periods have been extended as well, along with relaxed limitations on borrowers’ age requirement.

Hardship withdrawals cannot be paid back into your 401K as a standard loan would be. Still, taking out a withdrawal does not bar you from continuing your contributions to your plan. Additionally, your employees will not be required to pay the usual 10% early withdrawal penalty, no matter their age. (Normally, the cutoff is 59.5 years old). There may be exceptions to this, depending on the amount of money withdrawn.

To assist you in deciding on whether to withdraw from your 401K or not, get in touch with a 401K provider. They will alert you to all the advantages and drawbacks of following through with a 401k withdrawal, and help you to make the best decision that will help your company both now and in the long run.

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