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Chapter 18. Cashing In or Out of Your 401(k) > Safe Harbor Tests - Pg. 177

Cashing In or Out of Your 401(k) 177 Terms to Know A safe harbor is not a place to anchor and ride out a storm, but that's close. It means the employer won't face an IRS audit and challenge if all hardship withdrawals are limited to those specified in the IRS code. Next, the employer must determine whether the hardship withdrawal is necessary to satisfy the employee's immediate and heavy financial need. The test is satisfied if the withdrawal does not exceed the amount required to relieve the financial need, and the need cannot be satisfied from other resources that are reasonably available to the employee. (Translation: You can't take more than you need, and this better be your last resort.) Resources here means all of your resources, including what your spouse owns and your minor children, except for property held for a child in a Uniform Gift to Minors Act account. For What It's Worth A hardship withdrawal will be included in the employee's income and may be subject to a 10 percent penalty if the employee hasn't attained age 59½. The plan will send out a 1099-R to the employee and the IRS, so they'll know exactly what you got. Safe Harbor Tests Let's review what you need to do if your employer uses the safe harbor test. This is more restrictive than the facts and circumstances test, but, as an employee, you'll know what you can expect. By the safe harbor rule, withdrawals are only allowed for the following: · Unreimbursed medical expenses for the employee, employee's 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 the employee, employee's spouse, dependents, or children who are no longer dependents. · Payments necessary to prevent eviction of the employee from his home, or foreclosure on the mortgage of the principal residence. For employers it's much easier to use the safe harbor rules, for they then don't have to make judg- ment calls in determining whether their employee has a real need. Things get tougher, so read on. If you satisfy one of the above and you decide to take a withdrawal, there's more. For the withdrawal to be deemed necessary there are four requirements: