IRS provides retirement plan loan and hardship distribution relief for victims of Hurricane Maria and California wildfires

The IRS has announced that it is providing relief to taxpayers who have been adversely affected by Hurricane Maria and recent wildfires in California, and have retirement assets in qualified employer retirement plans they would like to use to alleviate hardships caused by these disasters. This relief is in addition to the relief already provided by the IRS pursuant to IRS News Releases VI-2017-02 (September 22, 2017), PR-2017-02 (September 22, 2017), and CA-2017-06 (October 13, 2017). Specifically, the IRS is relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape.
Relief is also provided to these taxpayers from certain verification procedures that may be required under retirement plans with respect to loans and hardship distributions. In addition, the six-month ban on 401(k) and 403(b) plan contributions that normally affects employees who take hardship distributions will not apply.
Code Sec. 401(k) plan participants, employees of public schools and tax-exempt organizations with Code Sec. 403(b) tax-sheltered annuities, and state and local government employees with Code Sec. 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Although IRA participants are barred from taking out loans, they may be eligible to receive distributions under the liberalized procedures. Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area. To qualify for this relief, hardship withdrawals must be made by March 15, 2018. Plan loans pursuant to this relief must satisfy the requirements of Code Sec. 72(p).

Plan relief

A qualified employer plan will not be treated as failing to satisfy any Code or regulation requirements merely because the plan makes a loan or a hardship distribution for a need arising from Hurricane Maria or the California wildfires to an employee or former employee whose principal residence or place of employment on September 16, 2017 for U.S. Virgin Islands, September 17, 2017 for Puerto Rico, or October 8, 2017 for California was located in one of the counties that have been identified for individual assistance by the Federal Emergency Management Agency (FEMA) because of devastation caused by these disasters. This relief includes employees’ or former employees’ lineal ascendants or descendants, dependents, or spouses who had a principal residence or place of employment in one of the covered areas on that date. If additional areas are identified by FEMA for individual assistance because of damage related to these disasters, the relief provided here will also apply from the date specified by FEMA as the beginning date.
In addition, a retirement plan will not be treated as failing to follow procedural requirements for plan loans or distributions imposed by the plan merely because those requirements are disregarded beginning on or after September 16, 2017 for U.S. Virgin Islands, September 17, 2017 for Puerto Rico, or October 8, 2017 for California and continuing through March 15, 2018, provided the plan administrator (or financial institution in the case of distributions from IRAs) makes a good-faith diligent effort under the circumstances to comply with those requirements. However, as soon as practicable, the plan administrator (or financial institution) must make a reasonable attempt to assemble any necessary documentation.

Qualified employer plan

A qualified employer plan, for purposes of this disaster relief, is a plan or contract that meets the requirements of Code Secs. 401(a) (including plans treated as qualified under Code Sec. 401(a) because of an election made pursuant to ERISA Sec. 1022(i)(2)), 403(a), and 403(b), and, for purposes of the hardship distribution relief, that could make hardship distributions if its plan document had enabling language. A 457(b) deferred compensation plan also is a qualified employer plan, and any hardship arising from Hurricane Maria or the California wildfires should be treated as an “unforeseeable emergency” for purposes of distributions from the plans. A defined benefit plan or money purchase plan, which generally may not make in-service hardship distributions, may only make hardship distributions from any separate account within the plan that contains either employee contributions or rollover amounts.

Hardship distributions and loans

The amount available for hardship distributions is limited to the maximum amount that is permitted for plan hardship distributions under the Code and regulations. However, the relief provided by the IRS applies to any hardship of the employee, not just the types enumerated in the regulations, and no post-distribution restrictions on contributions are required. A hardship distribution must be made on or after September 16, 2017 for U.S. Virgin Islands, September 17, 2017 for Puerto Rico, or October 8, 2017 for California and no later than March 15, 2018, and because of a hardship resulting from Hurricane Maria or the California wildfires.
Plan administrators may rely upon the employee’s or former employee’s representations as to the need for and amount of a hardship distribution, unless the administrator has actual knowledge to the contrary.
The IRS noted that, in general, the normal spousal consent rules continue to apply. Also, except to the extent that the distribution is made up of already-taxed amounts, a distribution made pursuant to this relief will be includible in gross income and generally subject to the 10% additional tax under Code Sec. 72(t).

ERISA violations

The Department of Labor has advised the Treasury Department and the IRS that it will not treat any person as having violated the provisions of Title I of the ERISA solely because that person complied with these relief provisions.

Source: IRS Announcement 2017-15.
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