In case you missed it, the East Coast has had an odd month or so with an earthquake, hurricane and flooding. In trying to find money to pay for repairs and clean up, some folks might look to their retirement plan savings as a resource. Here are the nuts and bolts of "hardship distributions."

The IRS has a good FAQ for Hardship Distributions, but here are some of the basics:

  1. A retirement plan is not required to permit hardship distributions. Check with your plan to find out if it permits a distribution.
  2. The plan has to set specific criteria for distributions and how a hardship is determined. There is a determined way to apply for and get approval for the distribution. The rules of the plan also have to be satisfied.
  3. The IRS generally defines a hardship as "an immediate and heavy financial need" and the most common examples are medical expenses, purchase of a principle residence, tuition, funeral expenses and "certain expenses for the repair or damage of the employee's principle residence."
  4. Employees must have all other available distributions and loans from the plan prior to receiving the hardship distribution.
  5. Employees cannot make elective deferrals to the plan for six months after receipt of a hardship distribution.
  6. Hardship distributions are generally limited to the amount of the employee's total elective contributions (less any previous withdrawals).
  7. Hardship distributions are generally includable in gross income and may be subject to taxation as an early distribution of elective deferrals.

Hardship distributions may be available to an employee to cover the costs of repair or recovery from a natural disaster, provided the plan permits it and they have no other available financial options.  It is not designed to be the first source of money. Instead, it should be the option of last resort. Bear in mind, there can be negative tax implications from the distribution.
Finally, there is something called a "qualified hurricane distribution" that provides for special relief for victims of hurricanes Katrina, Rita and Wilma. This relief is not presently available for victims of hurricane Irene but it may become available in the future.

Keith R. McMurdy, partner at Fox Rothschild LLP in New York, can be reached at 212.878.7919 or

Go to for more information.

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