401(k) Withdrawals for Medical Surgery

Not all surgeries qualify for an exemption from the early withdrawal penalty.

Not all surgeries qualify for an exemption from the early withdrawal penalty.

Needing funds for medical surgery may allow you to access your 401(k) plan funds before you turn 59 1/2 and without leaving your job. However, the rules of your particular plan might still keep a lock on your account. Before taking an early distribution, know the tax consequences and whether or not you can avoid the 10 percent early withdrawal penalty.

Plan Must Allow

You can only take an early 401(k) plan distribution for medical surgery if your plan allows for hardship distributions and medical expenses represent a permissible hardship. Your plan administrator can tell you whether your surgery will qualify for a hardship distribution under your particular plan rules. However, the IRS does not mandate that every 401(k) plan offer hardship withdrawals or that hardship withdrawals include medical expenses. If your plan doesn't, you can't take a distribution from the plan until you leave your job or reach age 59 1/2.

Tax Implications

When you take a withdrawal from your 401(k) plan for medical surgery, the distribution is always subject to income taxes whether you qualify for the penalty exception or not. The distribution is taxed as any other ordinary income on your tax return. If the exception applies to all of your distribution, you don't have to pay the 10 percent early withdrawal penalty. However, if the exception does not cover your entire distribution, you must pay the additional 10 percent penalty on the portion of the distribution not covered.

Medical Expenses Exception

Section 72 of the federal tax code permits an exception to the 10 percent additional tax penalty for distributions used to pay medical expenses that you could deduct as part of the medical expenses exception. However, the medical expenses exception only allows a deduction for costs that exceed a specified percentage of your adjusted gross income. As of 2012, costs in excess of 7.5 percent of your income are deductible. The threshold is set to increase to 10 percent in 2013. This is not an all-or-nothing exception because only a portion of your distribution might qualify. For example, if you have a $10,000 surgery, the deduction threshold is 10 percent and your adjusted gross income is $75,000, only $2,500 of your distribution would qualify for the exception.

Qualifying Surgeries

"Medical care expenses," the IRS explains, "include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body." The most notable exclusion is cosmetic surgery, which generally does not qualify. However, if the cosmetic surgery is performed to correct a genetic abnormality, a disfiguring disease or an accident, it is included. When figuring your medical expenses, you can include other qualifying costs besides just your surgery to increase the portion of your surgical expenses that will qualify for the exception.

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