The hardship exemption under Section 401(k) of the Internal Revenue Code permits a plan participant to receive an early distribution in situations involving an immediate and heavy financial need.   By law, such need expressly includes payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the employee, or the employee’s spouse, children, or dependents.

The question then arises:  Can your employees use the hardship exemption to pay off a student loan?  

According to the Internal Revenue Service (“IRS”), the answer is “no.”  In Information Letter 2018-001, the IRS explained that paying off student loans does not qualify for the hardship exemption because it is not payment for the “next 12 months” of post-secondary education.

As an alternative, however, an employee may be able to get a loan from the 401(k) plan and then use that money to pay off a student loan.  The loan from the 401(k) plan would be tax-free and the individual would have up to five years to repay it.

A copy of the IRS’s Information Letter can be viewed here:  IRS Information Letter 2018-0001, March 30, 2018.