Plan sponsors in areas Hurricane Sandy affected may want to prepare for an increase in loan or hardship withdrawal requests after the IRS on Nov. 16 said it temporarily will relax its rules that apply to such emergency funding for retirement plan participants. The IRS announced the relief in Announcement 2012-44.
Hurricane Sandy should be treated as an “unforeseen emergency,” as that applies to plans’ distribution requirements, the IRS said. These distributions may be used for purposes such as paying for food and shelter, which are beyond normal plan limitations on such distributions. The announcement says the relief is driven by the Obama administration.
The announcement does not change current law under which hardship distributions generally are taxable as income and to which a 10-percent early-withdrawal tax usually applies. But it does relax verification requirements or other restrictions on lending or hardship withdrawals that plan requirements normally may impose. Loans are generally tax-free if repaid in five years or less.
Qualified plans that do not allow for hardship withdrawals or loans must be amended to provide for them no later than the end of the first plan year beginning after Dec. 31, 2012, according to the announcement. And loans for Hurricane Sandy relief can be made before a plan is formally amended to do so, the IRS says.
To qualify for this relief, hardship withdrawals must be made by Feb. 1, 2013. Employees, other plan participants and certain members of their families whose principal residence or place of employment on Oct. 26, 2012, was located in Hurricane Sandy-covered disaster areas may benefit. The withdrawals and loans can be taken up to the maximum amount allowed by statutory or plan limits, the IRS says in the announcement.
Finding out More
For more guidance on early distribution tax from qualified plans and for more information about plan loan documentation, see ¶513 and ¶468 of Assigning and Loaning Benefit Plan Money, respectively.
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