Like loans, hardship withdrawals are allowed by law, but your employer is not required to provide for them in your plan. Again, most companies do, but some don't. The cost of administering such a program can be prohibitive for many small companies. Check with your Human Resources department if you're not sure if your plan allows hardship withdrawal. Like loans, your employer must adhere to some very strict and detailed guidelines.

The IRS code that governs 401k plans provides for hardship withdrawals only if: (1) the withdrawal is due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401k plan; and (5) you can't contribute to the 401k plan for six months following the withdrawal.

The following four items are considered by the IRS as acceptable reasons for a hardship withdrawal:

1. Un-reimbursed medical expenses for you, your spouse, or dependents.
2. Purchase of an employee's principal residence.
3. Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
4. Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
5. Beginning on January 1, 2006, you will also be able to make a hardship withdrawal for funeral expenses and repair of a primary residence.

Hardship withdrawals are subject to income tax and, if your are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.

For more background and information on 401k hardship withdrawals, check out these resources:

Hardship Withdrawals Give Access to 401k Savings, But at a Cost - Summary: A withdrawal taken in haste today could have a big impact on your golden years.

Don't Tap Your 401k to Pay Off Debt - Summary: If you take money out of your 401k to pay off your debts, you may regret it later. Taking out a loan or an early withdrawal will reduce your eventual retirement account and may force you to work longer.

Raiding 401k to Repay Credit Card Debt - Summary: "I'm considering borrowing from my retirement savings to pay off some of this debt. Do you think this is wise?"

Need Cash? Don't Rob Your 401k - Summary: People hard up for cash — whether they've been set back by a job loss or a disaster such a Hurricane - may be tempted to tap their 401k accounts and other company-sponsored retirement plans. But this should be a last resort, not only because they face possible penalties but also because it undercuts their long-term security.

The High Cost of Hardship - Summary: Short of cash? Tempted to take a "hardship withdrawal" from your company 401k plan? Don't. That advice comes from pension and benefits consultant Brooks Hamilton who feels that many people are making withdrawals without understanding the long term impact on their financial health.

U.S. Labor Department Action Helps Hurricane Victims Access 401k Plans - Summary: The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA), along with the Internal Revenue Service (IRS), announced guidance for employers and plan officials to help victims of Hurricane Katrina obtain distributions and loans through 401(k) and similar employer-sponsored plans.