Loan or hardship distribution due to Hurricane Sandy still subject to early distribution tax, IRS official says

A loan or a hardship distribution from a qualified employer plan for needs arising from Hurricane Sandy is still subject to the additional tax on early distributions under Code Sec. 72(t), said Erick Slack, acting manager, IRS Employee Plans Technical Guidance, during a December 11, 2012 IRS phone forum. Slack answered this and other questions on IRS Announcement 2012-44 issued in mid-November to assist certain Hurricane Sandy victims who would like to use retirement assets in qualified employer plans to alleviate hardships caused by the hurricane.

The announcement provides, in brief, that a qualified employer plan, such as a 401(k) plan or 403(b) plan, will not fail to satisfy any requirements under the Code or regulations just because it provides a loan or hardship distribution to a Hurricane Sandy victim. To qualify for the relief under Announcement 2012-44, taxpayers must:

• Have suffered hardship resulting from Hurricane Sandy;

• Have a principal residence or place of employment in an area covered by the IRS disaster designation or be a lineal ascendant or descendant of a person who was located in the Hurricane Sandy disaster area; and

• Take out the plan loans or hardship distributions between October 26, 2012, and February 1, 2013.

Slack stated the IRS was not going to insist that plan administrators overly scrutinize every request for hardship relief. He stated that, whether or not a requested loan or hardship distribution was actually intended to alleviate hardship resulting from Hurricane Sandy required a factual analysis. “Probably it will be straightforward for 99.9% of these cases,” Slack said. He added that it required a good-faith determination from the plan administrator.

CCH Note: The IRS has issued FAQs that provide additional guidance on Hurricane Sandy relief. See IRS Retirement News for Employers, Fall 2012 Edition, December 13, 2012.

Verification requirements

Announcement 2012-44 relaxes certain requirements for documentation when a plan participant requests a loan or hardship distribution from a qualified employer plan. The relief states that a plan administrator may rely on an employee’s representation as to the need for and the amount of a hardship distribution, unless the administrator has actual knowledge to the contrary.

Early distributions tax not waived

Many plan participants and administrators took the guidance to mean that the IRS had waived the 10% additional tax, Slack said. “However, there is nothing in this guidance that waives the Code Sec. 72(t) additional tax.” This contrasts with the relief that the IRS provided for victims of Hurricane Katrina. Loans and distributions must also still comply with the requirements of Code Sec. 72(p), Slack added.

In addition, plans must have provisions that allow for a loan or hardship distribution. “Plans must have this language if they want to allow a loan or a distribution,” Slack said. “The IRS has eased some requirements relating to documentation and timing, but at the end of the day, the plan amendments must be there.” That means that if a plan does not provide for loans or hardship distributions and does not want to provide them, they are not required to do so under Announcement 2012-44.

“If your plan has provisions for plan loans and distributions for hardship, you can take advantage of the relief. If you don’t have the provisions, a plan amendment must be made by the end of the first plan year following December 31, 2012,” Slack said. He noted that, if existing plan language was very specific about not allowing loans or distributions for hardship, an amendment would need to be made before a participant could obtain a distribution.

Contributions

Announcement 2012-44 also provides relief from the six-month ban on making contributions to a 401(k) or 403(b) plan, which normally takes effect after an employee takes a hardship distribution. “If the plan language prohibits contributions after a distribution, but you want to take advantage of Announcement 2012-44, that is a purely administrative step requiring no amendment,” Slack explained.

Source: December 11, 2012 IRS phone forum.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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