Hardship withdrawals and 401(k) loans allow employees to tap into their retirement savings in certain situations, but they come with different rules and consequences. Hardship withdrawals are reserved for serious financial emergencies—like avoiding eviction or covering medical bills—and require documentation to qualify. These withdrawals are taxed, can’t be repaid, and permanently reduce the employee’s savings.
401(k) loans are more flexible. Employees can borrow up to 50% of their balance (typically up to $50,000) and repay it with interest over time, usually through payroll deductions. Unlike hardship withdrawals, loans don’t require a specific reason. However, if the loan isn’t repaid, the outstanding amount is treated as taxable income. Employers often set their own loan policies, such as a minimum account balance or limits on loan frequency.
In a recent 401kTV interview, Fred Barstein spoke with Alvaro, a plan sponsor who had just completed a TPSU program at the University of Denver. Alvaro shared that his plan allows loans for any reason, but hardship withdrawals require clear, qualifying circumstances—like an eviction notice. While some employees are initially frustrated when their hardship request is denied, most become more understanding once the plan rules are clearly explained.
Read the Full Transcript Here:
Fred Barstein:
Greetings. This is Fred Barstein, founder and CEO of 401kTV and TPSU. Just completed a program on the beautiful campus of the University of Denver, and I’m here with Alvaro. Welcome, Alvaro.
Alvaro:
Hi, welcome. Thank you.
Fred Barstein:
Okay, if we ask you a few questions?
Alvaro:
Yes sir.
Fred Barstein:
Very good. So one of the things you mentioned about, that you guys have rules relating to hardship and loans. So what are the rules that you have?
Alvaro:
So some of the rules are in regards to our hardships. I have had in the past where a couple employees want to come and withdraw funds as a hardship withdrawal from their 401(k) due to a couple personal reasons that they may be going through, and unfortunately I have had to deny a couple of them because they do not meet the rules and regulations that our plan has in order for a hardship withdrawal. Some of those rules can be like an eviction notice. If you’re getting evicted from your house, that could be one of many hardship reasons for you to withdraw funds from your…
Fred Barstein:
What about with loans? Do you have rules on that?
Alvaro:
Yes. Loans you have to have a minimum of a $1,000 loan balance, which would be $2,000 in your 401(k), so it’d be 50% of your actual balance in order to withdraw a loan from your retirement account.
Fred Barstein:
Do you have rules on what they can take the loan out for?
Alvaro:
No, not on the loans. On the loans, the loans are much more easy going and you don’t have to provide a reason for that, unlike the hardship.
Fred Barstein:
Right. But you could if you wanted [inaudible 00:01:50].
Alvaro:
Yes, that is correct.
Fred Barstein:
And do you have employees that are upset with that, or is it mostly accepted?
Alvaro:
In most cases it is accepted, because some employees are not fully aware of the rules for the 401(k) plan, which is understandable because especially as a new employee coming in, that’s not going to be your main focus, but once you explain to them what the rules and regulations are going to be in regards to their 401(k) plan, then they’re much more accepted of those.
Fred Barstein:
Right. Final question. A couple things you learned here, and do you recommend TPSU to other plan sponsors?
Alvaro:
I would. I would definitely recommend TPSU to other plan sponsors because they can learn a lot. Many people think they know already a lot, but once you attend a seminar like this, actually your knowledge is expanded. For example, today one of the biggest takeaways I took was from our breakout sessions. I was able to see that many other plans might have the same issues that we’re having, but they’re dealing with them in a different way that could have even boost my knowledge in that as well.
Fred Barstein:
So just hearing from your peers is, yeah, [inaudible 00:03:08].
Alvaro:
Definitely. Definitely.
Fred Barstein:
Well, thanks for your time, Alvaro.
Alvaro:
Thank you.
Fred Barstein:
I appreciate it, and thank you for watching 401kTV. Please stay tuned.
