Many 401(k) plans feature a hardship withdrawal option. Both the
IRS and DOL maintain strict regulations around these provisions. In
early 2017, the IRS issued updated audit guidelines regarding
requirements for hardship withdrawals and guidance for plan
sponsors on how to remedy errors in the administration of these
withdrawals.
Why Should You Give Participants the Option?
Even if your plan does not allow hardship withdrawals, it is
still subject to "plan leakage": Pre-retirement
reductions in plan savings by employees, through loans, hardship
withdrawals or payouts when changing jobs. According to the
Transamerica Center for Retirement Studies survey in December 2016,
27% of workers who currently participate in a qualified plan have
taken some form of a loan, early withdrawal or hardship withdrawal
from their plan. Plan leakage affects employees when they
retire.
