Financial Emergency!
It is unpredictable yet it happens to all of us. Whether its college tuition for your daughter, unexpected medical bills from an accident in the yard, covering the higher than expected closing costs on your new home or avoiding foreclosure or eviction because spending got out of hand; youre going to need money fast.
As one of the requirements for the tax exempt status of your Solo 401k, distributions of funds from your Solo 401k are limited to termination of employment, retirement, disability, death, plan termination or inservice distributions after age 59.5. Severe options for those needing a temporary cash infusion.
Your Solo 401k to the Rescue. To cover those temporary situations, the IRS allows Solo 401ks to provide disbursements of salary deferral contributions for financial hardships. These financial hardships must satisfy one of the following IRS preapproved conditions: Medical bills unreimbursed by insurance Secondary Education for yourself, spouse or dependentsPurchase of your primary residence orAvoid foreclosure or evictionThese hardship disbursements are not considered Solo 401k distributions with the option to be rolled over to IRAs or other qualified plans. But what happens if the solo 401k financial hardship does not meet one of these criteria? The request is denied and the consequences must be endured.
The IRS recognized that there were other significant events that could qualify as financial hardship and with IRS Regulation 2004-TD-9169, the IRS added two additional circumstances to the list of approved financial hardships. 1.Funeral Expenses and
2.Cost of Uninsured Repairs on your Primary Residence. These two new additions bring the approved circumstances to a total of six.
The changes to the safe harbor hardship rules resulting from the IRS regulations is the second set of changes to the hardship rules since GUST. The first set of changes occurred when EGTRRA reduced the holdout period for elective deferrals from 12 to 6 months. Please note that all of the changes to the hardship rules since GUST apply only to plans that use the safe harbor criteria for hardship withdrawals.
To add these two additional situations to the financial hardship provisions of your Solo 401k requires an amendment. Such an amendment should adopt the safe harbor financial regulations by reference so that any future additions are incorporated without additional amendment. |
