Certified Plan Sponsor Professional (CPSP) Practice Exam

What is a safe harbor event for hardship distribution?

1. Payment of medical expenses

2. Purchase of a new vehicle

3. Emergency home repairs

4. Education expenses

The correct answer is: Payment of medical expenses

A safe harbor event for hardship distribution refers to specific circumstances outlined in regulations that allow individuals to take a distribution from their retirement plan due to an immediate and pressing financial need. Payment of medical expenses qualifies as a safe harbor event because it represents an unavoidable expense that can significantly impact an individual’s financial health. The regulations recognize medical expenses as a legitimate reason for accessing retirement funds, ensuring that individuals can manage necessary health-related costs without facing undue financial stress. In contrast, while purchasing a new vehicle, making emergency home repairs, or covering education expenses might be pressing for some individuals, they do not meet the criteria established as safe harbor events under the Internal Revenue Service guidelines. These needs might not be deemed critical enough to justify early withdrawal from retirement savings without incurring penalties, emphasizing the importance of distinguishing between urgent expenses and those that may not have the same level of necessity.