If you are struggling to pay medical bills, education expenses, home repairs, or you want to make a down payment for your principal residence, a hardship withdrawal can come in handy.
Generally, when taking a hardship withdrawal, you will be required to provide proof of the hardship, either a medical bill, college fee structure, etc. to support the specific need you have. Plus, you are only allowed to borrow up to the amount needed to satisfy your financial need.
But, have you considered what will happen if you lie to get a hardship withdrawal? And, what will be the consequences of false hardship withdrawal?
Let’s find out.
What happens if you lie to get a hardship withdrawal?
Lying on a hardship withdrawal application can have both legal and financial consequences.
Legal consequences
Falsifying details on a hardship withdrawal application is considered fraud, which can have legal implications, including fines and penalties. In some cases, it can result in criminal charges, and if you are found guilty, you can be jailed.
Penalties and taxes you might face
When you are found guilty of falsifying a hardship withdrawal, you may be required to pay penalties, in addition to the income taxes you will owe on the funds. If your hardship withdrawal was eligible for a penalty exemption, that exemption will be revoked and you will be required to pay the full penalty.
Loss of trust
When you lie about a hardship withdrawal, and the employer and plan administrator find out, it can damage your reputation and result in a loss of trust. It can affect your ability to access hardship withdrawals in the future, and you will be subject to more scrutiny. Also, it can make it difficult to get a promotion in the company, because you will be viewed as a dishonest person.
What Happens If You Use Hardship Withdrawal for Something Else?
When you request a hardship withdrawal, and the request is approved, you can only use the funds for the intended purpose, such as home repairs, education expenses, funeral expenses, etc. You may also be required to provide documentation as proof of financial hardship.
However, if you use the withdrawal for any other purpose other than the intended purpose, there will be several consequences. Hardship withdrawals are usually subject to income taxes and may be exempted from early withdrawal penalties in some cases. If the plan discovers that you used the withdrawal for non-approved purposes, you will be subject to an additional 10% penalty tax if you are younger than 59 ½.
Additionally, taking a 401(k) withdrawal for non-approved purposes will result in a loss of retirement savings. The amount withdrawn won’t be available to grow over time, which can potentially jeopardize your long-term retirement goals. Since hardship withdrawals are not paid back, the withdrawal will have an impact on your financial future.
How Do 401(k) Plans Detect Falsified Hardship Withdrawal Applications?
When you apply for a hardship withdrawal from your 401(k) plan, the plan administrator will review your application and accompanying documentation to verify if it meets the eligibility criteria for a hardship withdrawal. Usually, 401(k) plans have specific procedures to verify the accuracy of the hardship withdrawal applications.
Here are ways that falsified hardship withdrawals can be detected:
Insufficient documentation
401(k) plans require plan participants to provide supporting documentation to prove the claimed financial hardship such as medical expenses, funeral expenses, post-secondary education expenses, etc. When you submit the required documentation, the 401(k) plan will review the documents to determine if they are legitimate and directly related to the claimed hardship.
Verification of information from third parties
If the plan is unable to determine the authenticity of the submitted documents, they can contact third parties such as medical providers, educational institutions, financial institutions, or funeral expenses to verify if the claimed hardship is accurate and legitimate.
In-house reviews
401(k) plans often do internal reviews to determine if the information submitted is consistent with previous applications. If you lied in a past application or requested funds for a similar hardship, you may be subject to further scrutiny. A history of inconsistencies may suggest fraudulent behavior.
Compliance with plan rules
401(k) plans must ensure that any account activities comply with plan rules and procedures. While plans may allow hardship withdrawals, they may limit withdrawals for certain hardships. Any deviations from the plan rules may result in further scrutiny to determine if the withdrawal meets the criteria provided for in the plan documents.
Can you go to jail if you lied about a hardship withdrawal?
Providing false information when applying for a hardship withdrawal is a serious offense, and it can have legal consequences. Usually, intentionally providing false information or documentation can result in civil or criminal charges. Whether you will go to jail depends on the severity of the fraudulent activities and the laws that apply in your state.
Apart from civil and criminal charges, you may be subject to legal penalties such as fines and paying back the amount withdrawn in full. The amount of fines may vary depending on the plan rules, and any fines specified in the plan documents.
401(k) plans are required to comply with various regulatory requirements, and any violations can result in investigations by various government agencies like the IRS. If the IRS discovers any fraudulent activities, there may be several consequences, including taking corrective action to remedy the violation, plan disqualification, penalties and fines on the plan sponsor, etc.
Bottom Line
Providing false information when applying for a hardship withdrawal is never a good idea. You can face legal and financial consequences that may extend into your future, threatening your financial plan for your golden days. Plus, your reputation as an employee may get tainted, and it can affect future withdrawals and even promotions at work.
FAQs
What proof do I need for a hardship withdrawal?
401(k) plans require documented evidence supporting your claimed hardship. This may include medical bills, repair estimates, or other relevant documents, depending on the nature of the hardship. Providing clear and accurate proof enhances the chances of approval for the withdrawal.
Do I need a reason for a hardship?
Yes, you require a valid reason for a hardship withdrawal. The reason must align with the qualifying criteria set by the 401(k) plan. Common reasons include medical expenses, home repairs, or educational costs. You should provide accurate and legitimate proof of hardship to get your application approved. Any inconsistencies can result in a rejection of the application.