ESOP Distribution Due to Hardship

Vesting

An employee must be vested, or have worked for his company for a specific time period, to be able to draw upon his ESOP funds. A fully vested employee is entitled to his ESOP's full value, but one who quits before becoming fully vested is only entitled to a partial distribution.

Hardship Definition

The IRS usually assesses an additional 10 percent tax on ESOP distributions drawn by an employee before she turns 59 and 1/2 years of age, but waives this penalty if she draws the funds due to financial hardship. Expenses that qualify as financial hardship include medical, funeral, tuition and expenses incurred to prevent foreclosure.

Hardship Distribution Consequences

An employee may not invest money into a retirement plan for six months after collecting a hardship distribution from his ESOP account. While an employee doesn't pay a tax penalty on the hardship distribution, he's still liable for the standard tax on retirement income.