Tax Preparation & Planning

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Monthly Archives:March 2017


401k Hardship Distribution for Medical Expenses

Ask the Money Coach:

My mother got into a car accident and can not make decisions on her own. I am currently her power of attorney. How can I cash out her 401K to pay for her expenses?

She has been out for over a week and doctors expect her to be disabled for quite some time. I need help to pay for everything so how can I get access to her 401k?

Response from Boston Money Coach:

For the immediate issue, you can contact your mom’s employer and speak with the HR department or the company’s 401k administrator about their specific requirements.  Employer plans may offer the option allowing employees to withdraw from the balance contributed by the employee but not all employers offer the option.  If the employer’s plan does allow for “hardship distributions,” you’ll be provided with the details on limits and procedures by them. You’ll need to provide documentation to them of your power of attorney.

Amounts Eligible for Distribution

Depending on what the plan allows, you may be eligible to tap from the balances accumulated from the employee elective deferrals, the employer profit-sharing contribution and any regular employer matching contributions.  Generally, the amount earned on elective deferrals is not available for a hardship distribution.

Criteria for a Hardship Distribution

To be eligible for a hardship distribution, from a participant’s account you need to show that the distribution is:

  • because of an immediate and heavy financial need, and
  • limited to the amount necessary to satisfy that financial need.

There are several “safe harbor” provisions available.  Medical expenses for an employee, employee’s spouse or children or beneficiary are at the top of the list.  Other eligible situations include costs incurred for the purchase or repair of the employee’s primary residence, education or funerals.

Tax Treatment of Distributions

Under IRS rules, you may withdraw money from the employer-sponsored plan but you will still have to pay income tax on the amounts and if your mom is under age 59 1/2 there will be a 10% penalty.

A Teachable Moment in Tax Planning

Tax and financial planning cannot prevent such crises but proper planning can help deal with them with less stress.  Life is filled with risks. At any time we can be literally and figuratively hit by something unexpected.  The goal of financial planning is to find ways to mitigate these risks.

Companies are supposed to have “disaster plans” in place.  We owe it to ourselves and our loved ones to do the same.

This is why I suggest to families that they review their auto and property insurance regularly to make sure that they have proper coverage in place for things like medical expenses.  I also suggest long-term and short-term disability insurance to help ensure that there will still be income coming in even if you are still in the hospital. I’m also a fan of supplemental benefits coverage (think AFLAC) to provide cash that may be a resource to cover bills above and beyond medical care.

But the best and most effective part of any safety net is having an emergency cash fund – liquid, safe and readily accessible. Another important element is proper legal documents in place.  As in this case, a family member of trusted friend having a power of attorney will help by allowing someone the authority to represent you and conduct your financial affairs in your absence.

But none of this works if you don’t plan ahead for the worst even when we all hope for the best.