Employment Retirement Income Security Act of 1974

• According to the federal Employment Retirement Income Security Act of 1974, plan administrators must comply with the federal retirement distribution rules if they maintain retirement contribution accounts for the benefit of their employees. ERISA requires plan administrators and fiduciaries to comply with the federal codes of conduct, the Consolidated Omnibus Budget Reconciliation Act of 1985 and the Health Insurance Portability and Accountability Act of 1996. Furthermore, ERISA requires plan administrators to comply with the Internal Revenue Code's plan qualification and distribution rules. Normally, under ERISA, 401(k) plan beneficiaries are entitled to receive their distributions only upon certain "triggering" events.
  
  

Triggering Events

• Triggering events include plan beneficiaries reaching the federal retirement age of 59-1/2 . Employees who are terminated from employment or resign can also elect to terminate their 401(k) plans or roll over their accrued benefits into IRAs or substitute 401(k) plans. Triggering events also include permanent decisions by employers to terminate their plans, according to federal regulations, employees who become disabled or when they die. The Internal Revenue Code also allows plan beneficiaries to withdraw their accounts earlier than retirement age if they experience a financial hardship.
  
  

Financial Hardship Withdrawals

• According to the Internal Revenue Code, financial hardship distributions are permitted when beneficiaries have undue and serious financial needs. An employee electing an early withdrawal for financial hardship must prove the existence of a hardship. Under federal law, distributions are deemed necessary for financial hardship reasons if beneficiaries need their retirement funds to pay for funeral expenses, for medical bills incurred for their dependents or spouses, to purchase a principal residence, to pay for college tuition for dependents, for employees or their spouses or to pay for principal residence foreclosure expenses. An employer or plan administrator is not required to permit an early withdrawal for non-financial hardship reasons. Non-financial hardship reasons include using retirement accounts to pay for non-necessary items, such as purchasing new appliances.
  
  

Limitations

• Divorcing spouses must prove that their financial conditions caused by their divorces or separations require them to take early withdrawals. Plan administrators can require divorcing employees to exhaust any other available assets before taking 401(k) distributions. Furthermore, plan administrators can require beneficiaries to liquidate all of their personal and real property, investment accounts and apply for loans. Fund administrators use a case-by-case analysis of whether an employee's impending divorce causes a financial hardship and serious financial need for an early withdrawal. If a fund administrator approves the hardship withdrawal, it can limit the withdrawal to an amount necessary to overcome the financial emergency, and an employee taking a hardship withdrawal before divorce cannot take another hardship withdrawal within six months.
  
  

Considerations

• Because state laws are fluid, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state.