IRS Forum Will Discuss Relief on Plan Loan and Hardship Distribution Requirements for Hurricane Sandy Victims
The Internal Revenue Service (IRS) will hold a free phone forum on Dec. 11, 2012 to address its recent announcement that individuals adversely affected by Hurricane Sandy will have easier access to plan loans and hardship distributions from their retirement plans. Pursuant to Announcement 2012-44 (Announcement) the IRS is relaxing its rules to allow certain employer-sponsored retirement plans to make loans and in-service distributions to hurricane victims and their families without satisfying certain requirements of the Internal Revenue Code (Code) or applicable regulations. The forum will answer common questions and discuss the options available to employees and their families and plan sponsors.
Individuals eligible for the relief described in the Announcement are employees or former employees whose principal residence or place of employment on Oct. 26, 2012 was located in a county or Tribal Nation identified as a federally declared "covered disaster area" affected by Hurricane Sandy (the IRS' website includes a list of the covered disaster areas
). Importantly, the relief also extends to certain family members of employees or former employees. The Announcement specifies that this includes an employee's or former employee's "lineal ascendant or descendant, dependent or spouse." In other words, not only may an employee who was directly impacted by the disaster take a distribution or borrow money from his or her retirement plan, an employee who lives outside the covered disaster area may take a loan or distribution from his or her retirement plan for his or her child, parent, grandparent, or other dependent who lived or worked in the disaster area. This means that employer retirement plans across the country should review the Announcement and understand its impact.
It should be noted that the Announcement is unclear about whether designated beneficiaries (i.e., non-spouse and non-dependent beneficiaries) would be eligible for the relief. In general, a retirement plan may permit hardship distributions to an employee for medical, tuition, or funeral expenses of a "primary beneficiary" named under the plan who has an unconditional right to the employee's account balance upon the employee's death. While hardship distributions may still be taken under these circumstances, the special relief provided pursuant to the Announcement does not explicitly extend to primary beneficiaries. This may be one of the topics addressed during the IRS' forum.
The retirement plans subject to this relief include "qualified employer plans" which include 401(a) retirement plans, 403(a) or 403(b) tax-sheltered annuities, and/or 457(b) deferred compensation plans maintained by tax-exempt and State and local governmental employers. For a 401(a) plan, a 403(a) plan, and a 403(b) plan, the in-service distributions would be treated as hardship distributions. For a 457(b) plan, this means that the distribution would be treated as made pursuant to an unforeseeable emergency.
If such a plan does not currently provide for loans or these in-service distributions, it may still make loans and distributions pursuant to the Announcement due to Hurricane Sandy if it would otherwise be allowed to provide for such loans or distributions. However, to qualify for the relief, the plan must be amended to provide for loans or distributions no later than the end of the first plan year beginning after Dec. 31, 2012. For calendar year plans, this means that the amendment must be made by Dec. 31, 2013. For fiscal year plans, the amendment must be made by the end of the fiscal year that begins in 2013. For example, if a plan has a July 1 plan year, the amendment would have to be made by June 30, 2013. These amendments are only required if the plan does not already provide for loans or hardship/emergency distributions.
Plan loans and distributions made pursuant to the relief provided under the Announcement are subject to the following general conditions:
Plan loans must satisfy the requirements of Code Section 72(p).
An in-service distribution must be made on or after Oct. 26, 2012, and not later than Feb. 1, 2013 on account of a hardship or unforeseeable emergency due to Hurricane Sandy.
While the amount available for a hardship or unforeseeable emergency distribution is still limited to the maximum amount allowed under the Code and the regulations, the relief applies to any hardship or unforeseeable emergency associated with the disaster and not just those listed in the regulations.
A plan is not required to follow the rules under the 401(k) regulations that prohibit an employee from making contributions for at least 6 months after a hardship distribution.
Plans may temporarily disregard the procedural requirements for plan loans or in-service distributions on or after Oct. 26, 2012, through Feb. 1, 2013, if the plan administrator makes a "good-faith diligent effort" to comply with those requirements (for example, obtaining spousal consent if required by the plan) and makes reasonable attempts to gather any missing documentation (such as a death certificate if an employee claims his or her spouse is deceased) as soon as practicable.
Note that the Announcement does not specifically state whether an individual who is a participant in two plans (e.g., a 401(k) and a 457(b) plan) would be required to take a hardship distribution before taking an unforeseeable emergency distribution under a 457(b) plan. We presume he/she may be required to do so, since the unforeseeable emergency distribution is generally only offered in dire circumstances where all other resources have been exhausted. This may be another question raised during the phone forum.
The phone forum to discuss the relief provided under the Announcement will begin at 2:00 p.m. Eastern time. Individuals who wish to participate must register by clicking on the registration link on the IRS web page
. If forum attendees have specific issues or questions regarding the relief (such as those noted above regarding whether primary beneficiaries are eligible for the relief and which distributions take priority if an employee participates in both a 401(k) plan and a 457(b) plan), they are encouraged to notify the forum speaker via email at firstname.lastname@example.org on or before Dec. 7, 2012
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.