403B Hardship Withdrawal


The Internal Revenue Service allows, but does not require, that 403(b) retirement plans offer hardship withdrawals. The employer decides whether such hardship withdrawals are permitted. In addition, an employer not only has the right to follow IRS guidelines or establish other criteria for defining what constitutes a financial hardship, but also to decide whether to limit the amount and type of funds available for distribution. However, 403(b) plans that do offer the option must follow IRS guidelines.

IRS Hardship Parameters

  • Although an employer has great leeway in creating a written hardship withdrawal plan, all plans must follow two important IRS guidelines. The first guideline says there must be an “immediate and heavy financial need,” and the second says the amount of the withdrawal can only be a sum necessary to meet the financial need and pay any taxes or penalties resulting from the hardship distribution.

Common Financial Needs

  • The IRS outlines six common immediate and heavy financial needs that most employers use as eligibility criteria in a hardship withdrawal plan. These expenses, which may pertain to you, your spouse and dependent children, include:

    • Expenses for medical care
    • Costs directly related to purchasing a home
    • Post-secondary education expenses coming due within the next 12 months
    • Payments necessary to avoid eviction or foreclosure
    • Funeral expenses
    • Certain home repair expenses

Common Limitations

  • An employer has the right to limit the dollar amount of a financial hardship withdrawal, even if your need meets all other eligibility guidelines. For example, an employer can limit a withdrawal to a maximum of $5,000, even if $8,000 is required to meet your immediate need. In addition, even though most employers do not make matching contributions to 403(b) plans, those that do can make matching contributions ineligible as part of a hardship withdrawal. If you contributed $10,000 and your employer contributed $3,000, the maximum amount available would be $10,000.

Taxes and Penalties

  • A 403(b) hardship withdrawal is subject to the same taxes and penalties the IRS imposes on early withdrawals from other qualified retirement plans. If you withdraw money before turning 59 1/2 years of age, the IRS imposes an additional 10 percent penalty in addition to incurring an income tax liability for the distribution at your current tax rate. For example, if meeting your financial hardship requires $10,000 and you are currently in a 25 percent tax bracket, you’ll incur a $3,500 tax bill. Your employer has the option to allow you to withdraw $13,500 to meet both the financial need and pay your taxes.


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