The IRS has a provision for employers to provide for a safe harbor withdrawal from a 401k plan if there exits an immediate and heavy financial need or burden. The only money exempt under the safe harbor rule is that which is used to satisfy that immediate and heavy financial need. According to the IRS the safe harbor hardship withdrawals from a 401k plan are limited to:
Any money which you take from your 401K which is classified as a hardship withdrawal should be used for one of the above purposes. If it is not used for that purpose, or if you withdraw money in excess of your needs, the IRS can enforce additional penalties if it is discovered through an audit that the money was withdrawn under false pretenses or if money in excess of what was needed was withdrawn and not used.
Hello again scott,
The penalties could be up to an additional 10% of your total withdrawal, or the excess withdrawal not used for a hardship purpose.
The IRS could impose these penalties under any circumstances, however, it is not likely that an withdrawal used for another purpose would be discovered other than through an audit. Once you are approved for the withdrawal, you are not required to show proof of how the money was spent. So unless you have an audit somoewhere down the line, then it would likely not be an issue. In the event of an audit, you may need to show that the money was used for one of the hardship purposes.