Taking a Hardship Withdrawal
Have you ever wondered what would happen if you ran into financial difficulties? If you’ve exhausted your outside resources but are still employed, you may still have some options open to you. Although Penn’s retirement plans are intended to provide you with income at retirement, there are some special situations in which you’re able to access your retirement funds through a “hardship distribution”.
You must have made pre-tax contributions to Penn’s Supplemental Retirement Annuity (SRA) plan in order to request a hardship distribution, and you must meet the requirements described below. It’s also important to note that there are tax consequences when taking a hardship distribution.
The rules and instructions for applying are described below. All hardship withdrawal applications must be approved by the Retirement Office in the Division of Human Resources.
The specific rules for qualifying for a hardship withdrawal, described below, were established by the Internal Revenue Service (IRS). You are responsible for deciding whether your situation is sufficiently serious to warrant an application to withdraw retirement funds. It’s recommended that you obtain advice from your legal and/or tax advisor in making this determination.
Only your pre-tax contributions to the Supplemental Retirement Annuity (SRA) plan are available for hardship withdrawal. Interest and earnings that may have accumulated in your account may not be withdrawn. If you qualify, you may withdraw all or a portion of your contributions—but no more than the documented hardship amount.
If you’re approved for a hardship withdrawal, your contributions to the SRA and all other retirement plans maintained by the University will be suspended for six months following receipt of the hardship distribution.
A hardship withdrawal must meet two essential conditions: 1) it must be necessary to satisfy an immediate and heavy financial need and 2) it must only be taken after all other reasonably available financial resources have been exhausted.
- Immediate and Heavy Financial Need
To satisfy an immediate and heavy financial need, the distribution must be for one of the following reasons:
- Expenses for medical care previously incurred by you, your spouse, or any of your dependents; or necessary for these persons to obtain medical care.
- Costs directly related to the purchase of a primary residence for you (excluding mortgage payments).
- Payment of tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for you, your spouse, or dependents.
- Payments necessary to prevent your eviction from or foreclosure on your primary residence.
- Payments for burial or funeral expenses for your deceased parent, spouse, or dependents.
- Expenses for the repair of damage to your primary residence that would qualify for the casualty deduction for income tax purposes.
- Exhaust All Other Reasonably Available Financial Resources
Before taking a hardship distribution, you must have exhausted all other reasonably available financial resources, including:
- reimbursement or compensation by insurance or otherwise;
- reasonable liquidation of your assets, to the extent that such liquidation would not itself cause an immediate and heavy financial need;
- not making contributions to the SRA;
- other distributions or nontaxable loans* from the SRA; and
- borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need.
*Note: You may qualify for an exemption from the loan requirement if the hardship request is for the purchase of a primary residence and obtaining a plan loan would disqualify you from obtaining other necessary financing.
Hardship distributions are taxable and, if you are under age 59 ½, may be subject to a 10% early withdrawal penalty by the IRS. If you have sufficient funds in your account, you may elect to have an additional amount withheld to cover the applicable taxes.
To apply for a hardship withdrawal, you need to do the following:
- Contact your investment carrier to request a Hardship Withdrawal Request Form.
- If you’re invested with TIAA-CREF, contact the Retirement Call Center at 1-877-PENN-RET (1-877-736-6738).
- If you’re invested with Vanguard, contact Vanguard Participant Services at 1-800-523-1188.
- Return the completed forms and appropriate support documentation of the reason for the hardship request to the Retirement Office in the Division of Human Resources for approval. Examples of appropriate support documentation include a copy of the contract or mortgage application for purchase of a primary residence or a copy of the college or university’s bill showing the amount owed for tuition. The documentation will need to show the amount of the financial need.
Please note: hardship withdrawals are subject to very specific rules put in place by the IRS. These rules must be followed carefully in order to avoid IRS sanctions for both the University and the employee. For this reason, no application for a hardship withdrawal will be approved without the appropriate support documentation.