Certified Payroll Professional Practice Exam

A "hardship" withdrawal in the context of a 401(k) plan signifies a withdrawal that is necessary to meet an immediate and heavy financial need. This type of withdrawal is specifically outlined by the IRS regulations and is intended for situations where the participant faces urgent financial challenges.

To qualify for a hardship withdrawal, the reason must be one of those explicitly recognized by the IRS, such as medical expenses, buying a primary home, tuition for education, or preventing eviction or foreclosure. The participant must demonstrate that the need is immediate and that the funds being withdrawn are limited to the amount necessary to alleviate that financial condition.

This categorization is important because it helps safeguard retirement savings by allowing withdrawals only under specific circumstances, thus encouraging individuals to reserve their 401(k) funds for retirement unless absolutely necessary. In contrast, the other choices refer to withdrawals that do not align with the regulations governing hardship withdrawals, either allowing unfettered access or implying penalties that are not applicable in these critical situations.