Qualifying for a hardship loan against your 401(k) requires literal hardship similar to Government requirements for poverty assistance. In other words, the financial hardship must be real and not a mere inconvenience resolvable through sale of assets, commercial loans, other retirement plan distributions, savings etc.
In regard to the specific 401(k) plan, the hardship loan availability must be either available or not-available in an impartial manner to all those who may or may not qualify for the loan i.e. the 401(k) administrator does not have to grant the loan, if it is not within the consistently and fairly applied terms of the loan.
Only certain expenses and amounts of expenses qualify for hardship loans. These expenses are outlined in section II of this article and do not include all funds within the 401(k) such as income produced within the 401(k). If you do qualify for a hardship loan against your 401(k) and your particular 401(k) plan allows it, you may take the steps necessary to request a hardship loan with a reasonable chance of having that loan approved. This article will also discuss those steps in section I.
• Steps for requesting a hardship loan against your 401(k)
After referring to section II of this article, and its related sources, you may find you qualify for a hardship loan from your 401(k). Several steps are required to request a hardship loan and involve contacting the appropriate person(s), completing necessary paperwork, documentation of hardship and receipt of funds. Essentially, those steps are as listed below:
Step 1: Review conditions of the 401(k) itself
Step 2: Determine whether or not you qualify for the loan
Step 3: Contact the 401(k) Administrator
Step 4: Complete financial hardship documentation
Step 5: Submit paperwork for consideration
Your human resources department and/or 401(k) administrator can answer specific questions regarding the qualifying amount of the hardship loan as specific criteria also exist pertaining to available funds. These criteria are also available for your review in the regulation referred to in the following section. The aforementioned person(s) may also assist you in completing the loan application process.
Since there are legal ramifications regarding receipt of hardship loans against your 401(k) if you don't qualify for the loan, the 401(k) loan administrator will likely require significant documentation of your hardship to avoid and reasonably demonstrate compliance with the 401(k) regulation. For example, copies of tax returns, account statements, living expenses such as utilities, and medical bills may be requested.
• Rules of Hardship: Qualifying for the loan
Hardship loans against 401K's are regulated by Title 26, Chapter 1, Sub-Chapter A, part 1.401(k) of the U.S. Code. Section (D)(3)(iii) outlines the specific definition of hardship that qualifies for a hardship loan against your 401(k). Hardship is defined by this Federal regulation as including the following. However, for the financial hardship criteria to apply, other sources of financing for the same may not be available, and the cost of the financial hardship may not be more than the funds available through the 401(k).
Financial hardship criteria
• Approved medical expenses
• Primary home acquisition expenses
• Educational expenses
• Residential necessity
• Funeral expenses
• Qualifying home repair costs
As mentioned in the introduction of this article, to qualify for a hardship loan against a 401(k) retirement plan requires literal hardship as defined by U.S. Statutory law. Another requirement of the hardship loan is that the hardship loan should not aggravate, create or the financial need by creating greater hardship through resolution of the expense. In other words, the loan itself must not create need. The rules of hardship also extend to immediate family such as spouse and individuals considered exemptions on U.S. 1040 Tax returns.
• 401(k) hardship loan tips
To better facilitate your application for a hardship loan against your 401(k), it may be helpful to be prepared for the process and familiar with the requirements. For example, if using a home purchase as a reason for hardship, it may be a good idea to make sure the amount needed for the purchase does not exceed the amount available through the loan. Doing otherwise could prove time consuming and difficult as both the mortgage application process and 401(k) hardship loan application process may be otherwise denied. The following tips may be useful when preparing to apply for a 401(k) hardship loan:
• Determine required amount of funds needed
• Assess funds available through the 401(k)
• Properly document hardship by assuring non-ownership of asset
• Review the proper section of U.S. Code Title 26, Chapter 1
• Read 401(k) account terms and statement(s)
After completing the steps contained in this article, you should in theory be better prepared to understand and carry out the 401(k) hardship loan process, or be aware of whether or not this is the right option for you. Your employer and/or 401(k) administrator should be contacted in order to gain more specific information about your particular 401(k) as terms of the 401(k) such as availability of 401(k) hardship loan availability can vary.
In regard to the specific 401(k) plan, the hardship loan availability must be either available or not-available in an impartial manner to all those who may or may not qualify for the loan i.e. the 401(k) administrator does not have to grant the loan, if it is not within the consistently and fairly applied terms of the loan.
Only certain expenses and amounts of expenses qualify for hardship loans. These expenses are outlined in section II of this article and do not include all funds within the 401(k) such as income produced within the 401(k). If you do qualify for a hardship loan against your 401(k) and your particular 401(k) plan allows it, you may take the steps necessary to request a hardship loan with a reasonable chance of having that loan approved. This article will also discuss those steps in section I.
• Steps for requesting a hardship loan against your 401(k)
After referring to section II of this article, and its related sources, you may find you qualify for a hardship loan from your 401(k). Several steps are required to request a hardship loan and involve contacting the appropriate person(s), completing necessary paperwork, documentation of hardship and receipt of funds. Essentially, those steps are as listed below:
Step 1: Review conditions of the 401(k) itself
Step 2: Determine whether or not you qualify for the loan
Step 3: Contact the 401(k) Administrator
Step 4: Complete financial hardship documentation
Step 5: Submit paperwork for consideration
Your human resources department and/or 401(k) administrator can answer specific questions regarding the qualifying amount of the hardship loan as specific criteria also exist pertaining to available funds. These criteria are also available for your review in the regulation referred to in the following section. The aforementioned person(s) may also assist you in completing the loan application process.
Since there are legal ramifications regarding receipt of hardship loans against your 401(k) if you don't qualify for the loan, the 401(k) loan administrator will likely require significant documentation of your hardship to avoid and reasonably demonstrate compliance with the 401(k) regulation. For example, copies of tax returns, account statements, living expenses such as utilities, and medical bills may be requested.
• Rules of Hardship: Qualifying for the loan
Hardship loans against 401K's are regulated by Title 26, Chapter 1, Sub-Chapter A, part 1.401(k) of the U.S. Code. Section (D)(3)(iii) outlines the specific definition of hardship that qualifies for a hardship loan against your 401(k). Hardship is defined by this Federal regulation as including the following. However, for the financial hardship criteria to apply, other sources of financing for the same may not be available, and the cost of the financial hardship may not be more than the funds available through the 401(k).
Financial hardship criteria
• Approved medical expenses
• Primary home acquisition expenses
• Educational expenses
• Residential necessity
• Funeral expenses
• Qualifying home repair costs
As mentioned in the introduction of this article, to qualify for a hardship loan against a 401(k) retirement plan requires literal hardship as defined by U.S. Statutory law. Another requirement of the hardship loan is that the hardship loan should not aggravate, create or the financial need by creating greater hardship through resolution of the expense. In other words, the loan itself must not create need. The rules of hardship also extend to immediate family such as spouse and individuals considered exemptions on U.S. 1040 Tax returns.
• 401(k) hardship loan tips
To better facilitate your application for a hardship loan against your 401(k), it may be helpful to be prepared for the process and familiar with the requirements. For example, if using a home purchase as a reason for hardship, it may be a good idea to make sure the amount needed for the purchase does not exceed the amount available through the loan. Doing otherwise could prove time consuming and difficult as both the mortgage application process and 401(k) hardship loan application process may be otherwise denied. The following tips may be useful when preparing to apply for a 401(k) hardship loan:
• Determine required amount of funds needed
• Assess funds available through the 401(k)
• Properly document hardship by assuring non-ownership of asset
• Review the proper section of U.S. Code Title 26, Chapter 1
• Read 401(k) account terms and statement(s)
After completing the steps contained in this article, you should in theory be better prepared to understand and carry out the 401(k) hardship loan process, or be aware of whether or not this is the right option for you. Your employer and/or 401(k) administrator should be contacted in order to gain more specific information about your particular 401(k) as terms of the 401(k) such as availability of 401(k) hardship loan availability can vary.
Sources:
1. http://www.irs.gov/retirement/article/0,id=162416,00.html
2. http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=%2Findex.tpl
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