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Hardship Withdrawal - Definition of "Postsecondary Education"

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Zigner

Senior Member, Non-Attorney
California -

Our 401(k) plan allows our employees to take a hardship withdrawal for (among other things) paying tuition for postsecondary education. We have an employee who wants to make a hardship withdrawal for the purposes of paying for truck driving school. My view is that this is considered a trade school and eligible. Others in our organization are not so sure. Thoughts?
 


FlyingRon

Senior Member
I don't know about 401k, but as far as the tax credits go, trade schools certainly ARE eligible.
 

PayrollHRGuy

Senior Member
In CA truck driving schools are regulated by th Dept. of Education, Bureau of Postsecondary Education (BPPE). So an argument could be made that is should be.
 

Taxing Matters

Overtaxed Member
Upon being asked a similar question, our Compliance unit said No.
I'm a bit surprised. Unless the plan has a specific definition of "postsecondary" education that would exclude trade schools, a truck driving school would meet the definition. Primary education in the U.S. is elementary school, typically grades 1-6 or 1-5. Secondary education in the U.S. is middle school (grades 6-8) or junior high (grades 7-9) and high school (grades 9-12 if middle schools are used, grades 10-12 if junior highs are used). Postsecondary education is, as the name itself indicates, education that takes place after secondary (high school) eductation. And pretty much any education beyond high school would technically be "postsecondary" under the general definition of the term. See Webster's definition of postsecondary. (And it is just one word, even though lots of people split it in two.) The U.S. Department of Education, in a publication proposing standard terms related to postsecondary education also defined it broadly:

A postsecondary education institution is defined as an academic, vocational, technical, home study, business, professional, or other school, college or university — or other organization or person — offering educational credentials or offering instruction or educational services (primarily to persons who have completed or terminated their secondary education or who are beyond the age of compulsory school attendance) for attainment of educational, professional, or vocational objectives.
Postsecondary Student Terminology, page 3. It goes to to specifically say that trade programs programs like flight schools, cosmetology schools, etc, are included within the post secondary education. Similarly, for purposes of the ADA, Rehabilitation Act of 1973, and federal tax credits and deductions, the term postsecondary is also broadly defined to include pretty much all the programs in that U.S. Department of Education publication.

I'm not saying your compliance unit was wrong since I have not reviewed the details of your plan, which may include a specific definition of the term. I could see that your elite university employer might limit the term to the kind of education it offers: college degrees (perhaps including 2 year as well as 4 year and post graduate degree programs) and not trade schools. But I would not assume that because it did not meet the requirements for your plan that it would not meet it for others.

And, by the way, it does matter exactly what the plan says. The federal tax rules for 401(k) hardship withdrawals simply deem "tuition and related educational fees and expenses" as automatically being a hardship type of expense that a plan may allow as a hardship withdrawal. Note that it does not limit that tuition to any particular kind of education. See the
IRS retirement plan FAQ page, question 2. It is up to the employer plan to specify which kinds of hardships it will allow for hardship withdrawals. The employer cannot allow for things the IRS does not consider a hardship, but the employer does not have to allow for all the things that the IRS would allow.
 
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cbg

I'm a Northern Girl
Tax - I think, if I remember correctly, that it had to do with definitions in the specific plan; we're union and the union plans don't always line up exactly with the university plans.
 

Zigner

Senior Member, Non-Attorney
Tax - I think, if I remember correctly, that it had to do with definitions in the specific plan; we're union and the union plans don't always line up exactly with the university plans.
Our plan doesn't provide a specific definition of "postsecondary".
 

Taxing Matters

Overtaxed Member
Tax - I think, if I remember correctly, that it had to do with definitions in the specific plan; we're union and the union plans don't always line up exactly with the university plans.
That's pretty much what I expected, that the plan at your employer itself had a specific definition. If the plan does not have a definition and just uses the term "postsecondary education" then I believe the hardship withdrawal is permitted by the plan given the definitions for postsecondary education that I discussed earlier.
 

Zigner

Senior Member, Non-Attorney
Does it list the types of education that would qualify for the hardship withdrawal?
Nope. For Financial Hardship Withdrawals, it lists this: "...payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the Participant, his spouse, children, or dependents..."

No specific types of education listed.
 

Taxing Matters

Overtaxed Member
Nope. For Financial Hardship Withdrawals, it lists this: "...payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the Participant, his spouse, children, or dependents..."

No specific types of education listed.
Then I think your employee is good to get the withdrawal.

And as a side note, the drafter of that clause should be taken to task for misspelling the word postsecondary. It's not two words or a hyphenated word. It is one word. :p
 

cbg

I'm a Northern Girl
I found a definition online that essentially said, if you need a high school education or a GED before you can enroll in the course, it likely applies as far as Federal definitions are concerned.

Our university is very much in favor of continuing ed and is very generous with tuition assistance for pretty much any kind of education, so I'm thinking there must have been something specific about this case that the employee was turned down. I wish I could remember the details. I know we did eventually find him some funding without going into his retirement plan.
 

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