401(k)s Under HOTMA: What Is Excluded, What Is Included, and What Happens After a Withdrawal?

Let’s begin with a quick HOTMA knowledge check!

A family member has $157,500 in a 401(k).

How much of that balance is included in the family’s net family assets?

The answer is $0.

The account balance is excluded, but that does not mean every dollar connected to the account receives the same treatment.

The balance held in the account, investment growth occurring inside the account, current employment wages, periodic retirement payments, one-time withdrawals, loans, and rollovers must be evaluated separately.

That distinction is where 401(k) determinations can become confusing.

The First Question: What Kind of Account Is It?

Under 24 CFR § 5.603, the value of an account held under a retirement plan recognized as such by the Internal Revenue Service is excluded from net family assets.

This includes:

• Individual retirement arrangements, commonly known as IRAs

• Employer retirement plans

• Retirement plans for self-employed individuals

A bona fide 401(k) is an IRS-recognized employer retirement plan.

The exclusion may apply to legitimate plans such as:

• Traditional or pre-tax 401(k) plans

• Roth 401(k) plans

• Safe Harbor 401(k) plans

• SIMPLE 401(k) plans

• Solo or One-Participant 401(k) plans

• Former-employer 401(k) accounts when the funds remain within the retirement plan

The label describing the particular 401(k) structure is not the deciding factor.

The critical question is:

Is this account held under a retirement plan recognized by the IRS?

If the answer is yes, the value held inside the account is excluded from net family assets.

The Account Balance Is Excluded

A family’s 401(k) balance is not included when calculating net family assets.

The PHA should not:

• Add the account balance to the family’s countable assets

• Treat the balance as an available regular investment account

• Calculate actual income from the excluded account

• Assign imputed income to the excluded balance

A statement showing a large 401(k) balance does not make that balance countable.

The account’s exclusion, however, does not automatically answer every question about money associated with it.

Earnings Remaining Inside the Account Are Also Excluded

Interest, dividends, and investment growth that remain inside an IRS-recognized retirement account are excluded from annual income.

The PHA does not count:

• Interest accumulating inside the account

• Dividends reinvested within the account

• Increases in the account’s market value

• Other investment growth that remains within the retirement plan

The earnings have not lost their excluded treatment merely because they appear on an account statement.

Staff must distinguish between earnings remaining inside the account and money actually distributed to the family.

HUD’s 401(k) Example

HUD provides a helpful example involving:

• A prior-quarter 401(k) balance of $157,500

• A five-percent yield of $7,500

• Monthly distributions of $1,000

• Total annual distributions of $12,000

HUD’s treatment is:

This example illustrates the central rule:

The account is excluded. Periodic payments received from the account are included.

Periodic Payments Are Included as Income

Under 24 CFR § 5.609(b)(26), income received from an IRS-recognized retirement account is excluded from annual income except for distributions made through periodic payments.

Periodic payments may include:

• Monthly retirement distributions

• Quarterly distributions

• Regular annual distributions

• Other retirement payments received on an established or recurring schedule

If a family member receives $1,000 each month from a 401(k), the PHA would generally include the anticipated $12,000 in annual unearned income.

The fact that the payments originated from an excluded account does not make the periodic distributions excluded once the family receives them.

What About a One-Time Withdrawal?

A one-time or nonperiodic withdrawal is treated differently from a recurring retirement payment.

The language of 24 CFR § 5.609(b)(26) excludes income received from an IRS-recognized retirement account except for periodic payments. Therefore, a legitimate nonperiodic withdrawal is generally excluded from annual income.

But the analysis cannot end there.

Once money leaves the excluded retirement account, staff must determine what happened to it.

If the family deposits the money into a regular:

• Checking account

• Savings account

• Certificate of deposit

• Brokerage account

• Other countable account or investment

  
  

The retained funds may become part of the family’s net family assets under the rules applicable to that new account.

In other words:

A withdrawal may be excluded as income but later become a countable asset if the family continues to hold the funds in a countable form.

The PHA must separately evaluate:

1. The nature of the payment when it was received; and

2. The form in which the family currently holds the money.

What About a Direct Rollover?

A direct rollover generally keeps the money inside the retirement-account structure.

Examples may include:

• A former-employer 401(k) rolled directly into an IRA

• A 401(k) transferred directly into another eligible employer plan

• A trustee-to-trustee transfer between qualifying retirement accounts

  
  

If the money remains in an IRS-recognized retirement account, it continues to receive the retirement-account exclusion.

Staff should distinguish a direct rollover from a transaction in which the family receives the funds and places them into a regular bank or investment account.

The destination of the funds matters.

What About a 401(k) Loan?

A legitimate 401(k) loan is not the same as a withdrawal or retirement distribution.

Under 24 CFR § 5.609(b)(20), loan proceeds received by a family are excluded from annual income.

Staff should verify that the transaction is an actual loan with a repayment obligation—not a hardship withdrawal, cash distribution, or other payment incorrectly described as a loan.

Any loan proceeds the family retains may still require evaluation under the net-family-asset rules based on where and how the funds are held.

Do Employee Contributions Reduce Gross Wage Income?

No.

This issue is separate from the retirement-account exclusion.

A family member’s voluntary payroll contribution to a 401(k) does not reduce the gross wage income used in the housing calculation.

For example:

The PHA still begins with the family member’s $40,000 in gross wages, subject to the applicable income-calculation requirements.

The employee cannot reduce countable employment income simply by directing part of the paycheck into a retirement account.

The account may be excluded as an asset, but the employee’s voluntary contribution does not become a deduction from gross wages for the housing calculation.

The Questions Staff Should Ask

When a 401(k) appears in a family’s documentation, staff should ask:

1. Is this an IRS-recognized retirement account?

   Do not assume every brokerage or investment account is a retirement plan.

   
   

2. Are the funds still inside the retirement account?

   If so, the balance and earnings remaining inside the account are excluded.

   
   

3. Did the family receive money from the account?

   Review distribution statements and other applicable documentation.

   
   

4. Was the payment periodic or nonperiodic?

   Periodic distributions are included as income. Nonperiodic withdrawals require a different analysis.

   
   

5. Was the transaction a withdrawal, loan, or rollover?

   These terms are not interchangeable.

   
   

6. Where did the money go?

   Funds removed from a retirement account may later become countable assets.

   
   

7. Is the family currently receiving regular payments?

   Determine the anticipated amount and frequency of the payments.

   
   

The file should document both the account classification and the treatment of any money received from it.

Simply marking the account “excluded” does not resolve the treatment of distributions.

Quick Reference: How Is It Treated?

A File Documentation Example

A clear file note may state:

The specific documentation will vary, but the file should show how staff reached the determination.

The Bottom Line

A 401(k) balance is excluded from net family assets under HOTMA.

Earnings that remain inside the retirement account are also excluded from annual income.

But periodic payments received from the account are included as unearned income.

A one-time withdrawal may be excluded from annual income, while funds retained after the withdrawal may become a countable asset.

And voluntary contributions made through payroll do not reduce the employee’s gross wage income.

The correct determination cannot be made solely from the word “401(k)” appearing on a statement.

Staff must identify:

• What the account is

• Whether the money remains inside it

• Whether the family received a payment

• Whether the payment was periodic

• Whether the transaction was a withdrawal, loan, or rollover

• Where the money is currently being held

  
  

The account may be excluded. The money coming out of it may not be.

That is the distinction that matters.

Until next time, keep the coffee warm, the documentation clear, and the calculations accurate.

~ Lisa

Regulatory References

• 24 CFR § 5.603, definition of net family assets

• 24 CFR § 5.609(b)(20) and (26), annual-income exclusions

• HUD Notice H 2023-10/PIH 2023-27, Revision 3

• IRS guidance regarding 401(k) and employer retirement plans

  
  

This article provides general educational information and should be applied together with current HUD requirements, applicable program guidance, and the PHA’s adopted policies.