28 year old with terminal illness/401k

Submitted by Leonard H Abrams on Mon, 2018-12-03 16:49

I have a 28 year old female who has not been working for about a year because of terminal illness that has now been deemed untreatable. She lives with my nephew but they are not married. The question at hand is whether or not she can get money from her 401k and avoid any penalties as a result? Obviously, this would be a hardship situation. I will appreciate any information that might be available along with references to our monthly report. I have done a search, but have been unable to locate a definitive solution. Thank you, Len Abrams, ChFC



Submitted by Alan - IRA critic on Mon, 2018-12-03 17:28

  • The penalty exception is simpler because any illness that is terminal will qualify for the disability penalty exception. A letter from her MD could be sent to the plan that should allow the plan to code the 1099R with Code 3, but even if the plan refuses, the taxpayer can file a 5329 and enter the disability exception code 03. This also applies if the 401k is rolled to an IRA before a distribution.
  • The IRS has proposed guidelines for expanded hardship distributions effective as early as 2019, but plans still have options to adopt only a portion of these guidelines and the effective date. One of the these provisions is to no longer make a loan requirement before a hardship distribution. Another question is how much of the balance qualifies for distribution. Therefore, the plan may have a different answer in January than they do now. While termination would eliminate the hardship distribution complexity, it might eliminate other benefits, so she should carefully consider any decision to terminate. 
  • Do not understand reference to your monthly report??

Submitted by Leonard H Abrams on Tue, 2018-12-04 19:06

IN my inquiry when I was referring to “monthly report” I was asking if there was a Slott Report that dealt with this issue?   Thanks, Len

Submitted by Alan - IRA critic on Wed, 2018-12-05 00:48

I am not aware of a monthly report on this specific subject. If the plan provides for hardship distributions, the employee in this situation would certainly qualify, and the medical expenses would waive the penalty but only on amounts over 7.5% of AGI. Funeral expenses qualify for hardship, but there is no penalty waiver for them. 

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