Can an incomplete 401k hardship withdrawal be reversed due to death?
The situation is that a friend was terminally ill and was struggling financially and so took a hardship withdrawal. His health took a turn for the worse and died before he received the check.
Now his wife told the bank he died and requested the withdrawal be reversed. Initially the bank said they would put the funds back into the account, but now (after 2 months) they are refusing, saying they can't because they already sent the withholding taxes to the IRS.
The bank has also stated they have never encountered this and are unsure how to proceed.
Can and how does this withdrawal get reversed, since the check was never cashed, and cannot be cashed since it is in his name only?
Any information or guidance regarding this unique situation would be appreciated.
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First, if the bank or admin for the 401(k) said it's too late to reverse, I'd take them at their word.
As far as the check goes, it's not uncommon to have to deal with the last checks coming to a deceased person. Without any will, the wife is presumed to be the next of kin, and she should be able to cash the check by showing the bank the husband's death certificate. Unfortunately, tax and 10% penalty are still due on this money unless she can get a waiver from the IRS.
Edit in reply to new comment - The check could not be cashed and was reissued. Therefore, in my opinion, the 60 day clock didn't start until the money was actually available (the date the new check was cut). The gray area is how the tax withheld will be treated. The deposit of the new check into an IRA, whether spousal or beneficiary still doesn't take the 20% withheld into account. The widow also needs to decide whether to take the funds into a spousal IRA or a beneficiary IRA. They are treated differently.
In the end, I think the IRS will be lenient as they tend to back off when such unusual situations are presented.
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