Hardship Distribution Rules for Self-Directed Solo 401(k)s
"According to the following article from the IRS, although not required, a retirement plan may allow participants to receive hardship distributions. A distribution from a participant’s elective deferral account can only be made if the distribution is both:
Due to an immediate and heavy financial need.
Limited to the amount necessary to satisfy that financial need.
Immediate and heavy financial need
The employer determines a participant has an immediate and heavy financial need based on the plan terms and all relevant facts and circumstances.
Consumer purchases (such as a boat or television) are generally not considered an immediate and heavy financial need.
A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
A distribution is automatically considered to be necessary to satisfy an immediate and heavy financial need if all of the following requirements are met:
The distribution isn't greater than the amount of the immediate and heavy financial need, including the amounts necessary to pay any taxes resulting from the distribution.
The employee has obtained all other currently available distributions (including distribution of ESOP dividends under section 404(k), but not hardship distributions) and nontaxable (at the time of the loan) plan loans, including all other plans maintained by the employer.
The employee isn't allowed to make elective deferrals to the plan for at least six months after the hardship distribution.
Safe Harbor Distributions
Effective Feb. 23, 2017, 401(k) plans may elect to use the "Summary substantiation method" for the six types of hardship distributions below. See Internal Revenue Manual (IRM) Section 220.127.116.11.4.1 (09-05-2017), and Exhibit 4.72.2-2, Attachment One Hardship Substantiation Information and Notifications for Summary of Source Documents.
Effective March 7, 2017, 403(b) plans may elect to use the "Summary substantiation method" for the six types of hardship distributions below. See IRM Section 18.104.22.168.4.1.1 (08-11-2017).
Under a “safe harbor” in IRS regulations, an employee is automatically considered to have an immediate and heavy financial need if the distribution is for any of these:
Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.
Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents or beneficiary.
Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
Certain expenses to repair damage to the employee’s principal residence.