Certified Plan Sponsor Professional (CPSP) Practice Exam

Which event qualifies a participant for a hardship distribution?

1. Payment of medical expenses

2. Loss of employment

3. Purchase of a home

4. Education expenses

The correct answer is: Payment of medical expenses

A hardship distribution is allowed in certain situations, primarily relating to immediate and urgent financial needs. The payment of medical expenses qualifies as a valid reason for a hardship distribution because it is considered a necessary expense that is often unforeseen and can place significant financial strain on an individual. In the context of retirement plans, hardship distributions are strictly regulated, and the Internal Revenue Service (IRS) specifies that participants can withdraw funds for certain categories of immediate and heavy financial needs. Medical expenses directly impact the wellbeing of the participant and are pivotal costs often requiring urgent attention. Therefore, when participants face significant medical bills that they cannot afford, this justifies the request for a hardship distribution. The other events—loss of employment, purchase of a home, and education expenses—do not all fall under the predefined categories for hardship distributions as recognized by the IRS. While loss of employment can certainly lead to financial hardship, it may not, in itself, qualify for a distribution unless it leads to specific expenses. Home purchases and educational expenses are generally not deemed necessary and immediate enough to justify a hardship withdrawal under the typical IRS guidelines, which focus on necessities like medical costs, funeral expenses, and similar urgent financial needs.