The IRS approves eight reasons for hardship withdrawals, including payment of medical bills for the employee or his dependents. Generally, you can use only the funds you contributed to your 401(k) account. However, some employers allow use of their matching funds if you meet the vesting requirements. Your withdrawal amount, which is permanently removed from your account, cannot exceed the amount needed to pay the medical expenses documented in the statements you provide, and the statements must bear dates that are recent. You will pay state taxes on the amount withdrawn, an early withdrawal penalty to the IRS and another 10 percent in federal taxes. The amount withdrawn is added to your taxable income for the year.
Request a loan from your 401(k) account if the option is included in your employer's plan. You do not have to give a reason for a loan. You borrow your own money and pay it back, with interest, in installments through payroll deduction. You do not pay an early withdrawal penalty or taxes on the loan amount, except for any amount not repaid. The IRS determines how much of your 401(k) funds you may borrow -- usually 50 percent of your vested balance -- and the repayment period. The loan amount is included in your taxable income for the year. However, the repaid amounts generate investment income.
Other Distribution Types
Outside of one of the allowed distribution methods, you cannot usually cash out or withdraw your total 401(k) balance while you remain employed by the company that has your plan. If you are old enough for mandatory distributions, you can obtain funds to pay medical bills by withdrawing the entire balance or setting up periodic payments to yourself. Mandatory distributions begin in the year you retire or reach age 70½, whichever occurs first. There is no penalty for early withdrawal, but you will pay taxes on the funds distributed.
Perform the transaction online if your employer has a self-service employee website for managing benefits. Log in to your 401(k) account and look for links to take a hardship withdrawal, loan or other distribution. Contact your plan administrator or customer service number if your employer's plan requires the use of paper forms or if you can perform the transaction with help from a call center representative.