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  1. #1
    Kelstone Guest

    401K Hardship Withdrawal Proof

    My situation is this and I live in California:

    I've worked for Company A for 6 years and am in very good standing. I have probably only missed a total of five days for being sick the whole time. One month ago I took a hardship withdrawal from my 401K ($3000.00) I was going to use it to purchase my primary residence. The Planned Administrator of Company A approved my hardship and did not ask me for proof at that time. I received my money from my account and ended up spending it paying off credit dept because the deal fell through on the purchase of my home. Company A was bought out by Company B about a month after my withdrawal was approved and no Company B is asking me to pay back the money in full in two weeks or be terminated. They say that since I did not provide proof that according to the ERISA and the IRS I am putting the plan and its assets in jeopardy. They say that if they are audited they could face penalties and fines.

    I feel that the planned administrator of Company A should have never approved the withdrawal if he was required to have proof from me. Is it legal for Company B to do this and fire me? Am I responsible for this or are they? Please help, I am desperate.

  2. #2
    Join Date
    Nov 2001
    It is entirely possible, in fact probable, that this is entirely legal.

    401k plans are heavily regulated at the Federal level because of their pre-tax status. Hardship withdrawals are ONLY permitted for very specific purposes, of which the purchase of a primary residence is one. However, paying off credit debt is not. We are not talking company policy here; we are talking Federal law.

    When the deal fell through, the correct thing to do would have been to put the money back into your 401k. It's not at all outside the realm of possibility that by using the 401k monies for a non-designated and non-approved purpose you may indeed have placed the entire plan in jeopardy. The fact that the administrator did not ask you for proof at the time does not justify your using the money for an undesignated purpose.

    I'm sorry if this sounds harsh, but IRS tax exceptions are not something to fool around with.

  3. #3
    renter3 Guest
    Paying off credits cards with a 401K is NOT permitted

    Plus If you dont pay it back YOU will have to pay income taxes on it as well, since it was a withdrawal.

    So you dont have much time to come up with the $3000.

  4. #4
    Kelstone Guest
    I did pay the income tax and the reason I took out the hardship was not to pay my credit cards, it was to buy a home. After I received the withdrawal, the deal fell through on the home. I was not aware that I would have to put the money back if the purchase fell through.

  5. #5
    Join Date
    Nov 2001
    I understand that the error was unintentional. But nonetheless, you used tax deferred monies for a non-approved reason and in doing so, may have created a problem for the entire plan. I've checked with a 401k expert about your post who confirms that your employer is acting correctly. I know this isn't the answer you want and I'm sorry, but you're going to need to either come up with a way to pay the fund back or be terminated. I don't see any way you can legally compel Company B to retain your employment without making reparation. 401k plans do get audited, in the light of Enron they're going to continue to get audited, and if the IRS/DOL catches what happened they will get hit with fines and penalties. It's all very well to say that the administrator didn't ask for proof, but the IRS is not going to accept that as an excuse.

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