Hospital stays are often unforeseeable and expensive, so you could be left scrambling for funds. If you've been squirreling away money in your pension plan, you might be able to take a distribution to help with your expenses. Even if you can, you could end up paying taxes and penalties.
Your ability to access your retirement funds to pay your hospital bills depends on the type of account. IRAs are the easiest to access, as you can remove money from them at any time. However, 401(k) and 403(b) employer plans are less flexible. Some of these plans are allowed to offer hardship distributions, such as for hospital bills, but not all plans permit them. If your pension doesn't allow for hardship distributions, you're out of luck.
Taxes and Penalties Still Apply
Even if you qualify for a hardship distribution and your pension permits them, you still have to pay income taxes and, if you're under 59 1/2, a 10 percent early withdrawal penalty. The distribution is taxed as ordinary income. You can avoid the penalty but not the income taxes, if you meet the medical expenses exception requirements. This exemption exempts amounts spent on qualified medical expenses in excess of the annual threshold from the penalty.
Qualified Medical Expenses
Qualified medical expenses include preventive care, diagnostics and treatment for medical, dental and vision care. This includes some elective procedures, but not all, because cosmetic procedures are generally not deductible. For example, if your hospital bills come from having your appendix taken out, the costs are qualified medical expenses. However, if your hospital bills are for hair implants, those don't qualify.
Only Expenses Exceeding Threshold
The early withdrawal penalty exemption only applies to the extent that your hospital bills could be deducted if you itemized on your tax return. For the 2012 tax year, that means only bills in excess of 7.5 percent of your adjusted gross income. For 2013 and beyond, the threshold increases to 10 percent of your adjusted gross income. For example, if your AGI is $44,000 in 2012, only bills in excess of $3,300 qualify for the exemption. In 2013 or later, with the same AGI, only hospital bills in excess of $4,400 qualify for the exemption.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."