Like loans, hardship withdrawals are allowed by law, but your employer is not required to provide for them in your plan. Again, most companies do, but some don't. The cost of administering such a program can be prohibitive for many small companies. Check with your Human Resources department if you're not sure if your plan allows hardship withdrawal. Like loans, your employer must adhere to some very strict and detailed guidelines.

The IRS code that governs 401k plans provides for hardship withdrawals only if: (1) the withdrawal is due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401k plan; and (5) you can't contribute to the 401k plan for six months following the withdrawal.

The following four items are considered by the IRS as acceptable reasons for a hardship withdrawal:

* Un-reimbursed medical expenses for you, your spouse, or dependents.
* Purchase of an employee's principal residence.
* Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
* Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.

Hardship withdrawals are subject to income tax and, if your are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.

For more information on this and other 401k issues, go to www.401khelpcenter.com.

About the Author

Mr. Meigs is the founder and President of 401khelpcenter.com, LLC a three-year-old Internet Company based in Portland, Oregon. It is a leading provider of information, opinion, analysis, news, rules, and other 401k resources for plan sponsors, small businesses, and employees.