Medical bills can add up very quickly, especially if you are between health insurance policies. While hospitals can use aggressive collection methods, the laws limit what accounts they can try to take money from for unpaid bills. Funds that you have in a 401(k) retirement account at work are protected from just about every type of collection.
Legal Protection for 401(k)s
As reported in the "Wall Street Journal," 401(k) plans at work are protected from just about every type of claim. The primary exception to this rule is that the Internal Revenue Service can pull money out of your 401(k) to pay a tax levy. Hospitals can't take them, though. Your other retirement accounts don't receive the same protections, though. For example, your individual retirement account enjoys at least $1 million of protection in a bankruptcy, but your rights vary from state to state.
While a hospital can't go after your 401(k) plan, it can come after you if you owe money. The "Los Angeles Times" reports that many hospitals will work with you if you talk to their representatives when you get the bill and try to make some payments. Once the hospital gives up, though, it may send the bill to a collection agency. Collection agencies can use a range of methods to collect, including suing you.
If you want to pay your medical bills but can't afford to, a 401(k) loan might be an option for you. If your employer allows it, you can generally take out half of your plan's balance, up to $50,000, as a loan. You will have to pay back the loan within five years, and you will have to pay interest. But you'll actually be paying the interest to yourself, as that's your money in the 401(k).
401(k) Hardship Withdrawals
If you don't think you can afford to pay back the loan or if your employer won't let you take a loan from the 401(k), you might be able to withdraw the money from your 401(k) to pay off your hospital bill. As with loans, your employer will have to let you do it. When you take out a hardship withdrawal, everything you take out will be taxable. In addition, you will have to pay a 10 percent penalty, unless the medical expenses exceed 10 percent of your adjusted gross income. In that case, the amount you withdraw to pay bills that exceed that threshold would be penalty free.
- The Wall Street Journal: How to Protect 401(k)s and IRAs From Creditors
- Los Angeles Times: How to Stop Medical Bills From Going to a Collection Agency
- Smart401k: Retirement Plan Loans
- FINRA: 401(k) Hardship Withdrawals -- Understand the Tax Bite and Long-Term Consequences
- Pension Insider: Retirement Plan News -- January/February 2014
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.