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Hurricane Irma relief: retirement plans can make loans, hardship distributions to storm victims

In an Announcement and accompanying News Release, IRS has announced that employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. And, while IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures. But, IRS is not waiving the 10% penalty that applies to early withdrawals.

In addition to explaining the new relief, this article provides a summary of other tax relief granted by IRS to victims of Hurricane Harvey and Hurricane Irma; see below.

Background. The laws relating to qualified employer plans impose various limitations on the permissibility of loans and distributions from those plans. For example, Code Sec. 401(k)(2)(B)(i) provides that in the case of a Code Sec. 401(k) plan that is part of a profit-sharing or stock bonus plan, elective deferrals may be distributed only in certain situations, one of which is on account of hardship.Code Sec. 403(b)(11) provides similar rules with respect to elective deferrals under a Code Sec. 403(b) plan. Code Sec. 457(d)(1)(A) provides that a plan described in Code Sec. 457(b) may not permit distributions before the occurrence of certain enumerated events, one being when the participant is faced with an unforeseeable emergency.

Certain other types of plans or accounts are not permitted to make in-service distributions (i.e., distributions to a participant who is still an employee) even if there is a hardship. For example, in-service hardship distributions are generally not permitted from pension plans or from accounts holding qualified nonelective contributions (QNECs) described in Code Sec. 401(m)(4)(C) or qualified matching contributions (QMACs) described in Code Sec. 401(k)(3)(D)(ii)(I). However, Rev Rul 2004-12, 2004-2 CB 478, holds that if amounts attributable to rollover contributions are separately accounted for within a plan, those amounts may be distributed at any time, pursuant to the employee’s request.

In order to make a loan or distribution (including a hardship distribution), a plan must contain language authorizing the loan or distribution.

A loan from a qualified employer plan to a participant or beneficiary is treated as a plan distribution unless:

1. The loan amount doesn’t exceed the lesser of: (i) $50,000, or (ii) 1/2 of the present value of the employee’s nonforfeitable accrued benefit under the plan. However, a loan up to $10,000 is allowed, even if it’s more than half the employee’s accrued benefit. (Code Sec. 72(p)(2)(A))
2. The loan is required to be repaid within five years, (Code Sec. 72(p)(2)(B)(i)) except that a longer repayment can be used for a principal residence plan loan, i.e., a loan used to acquire any dwelling unit which, within a reasonable time, is to be used as the participant’s principal residence; (Code Sec. 72(p)(2)(B)(ii))
3. Except as provided in the regs, the plan loan is amortized in substantially level payments, made not less frequently than quarterly; and (Code Sec. 72(p)(2)(C))
4. The loan must be evidenced by a legally enforceable agreement. (Reg. § 1.72(p)-1, Q&A 3)

Early (generally, pre-age 59.5) withdrawals from a qualified retirement plan result in an additional tax equal to 10% of the amounts withdrawn that are includible in gross income. (Code Sec. 72(t)(1)) The additional tax applies unless the taxpayer qualifies for one of several specific exceptions. (Code Sec. 72(t)(2), Code Sec. 72(t)(3)) There is no exception for hardship withdrawals. A similar rule applies to distributions from an IRA.

Plan provisions and regs under certain Code sections establish verification procedures that a plan must follow before loans or distributions can be made from the plan. For example, the regs under Code Sec. 401(k) set forth certain criteria an employee must meet in order to receive a hardship distribution. A plan may contain procedures designed to confirm that the criteria have been satisfied.

IRS provides relief. IRS has now provided various types of relief with respect to retirement plan distributions and loans.

RIA observation: Except with respect to certain dates, the relief provided to Hurricane Irma victims, and the rules for obtaining the relief, are the same as those that apply to Hurricane Harvey. For a discussion of Hurricane Harvey relief, see Weekly Alert ¶  30  09/07/2017.

As described below, a qualified employer plan will not be treated as failing to satisfy any requirement under the Code or regs merely because the plan makes a loan or a hardship distribution, for a need arising from Hurricane Irma, to an employee or former employee whose principal residence on Sept. 4, 2017, was located in one of the Florida counties identified for individual assistance by the Federal Emergency Management Agency (FEMA) because of the devastation caused by Hurricane Irma. That same rule also applies to persons whose place of employment was located in one of these counties on that date or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties on that date.

The counties identified for individual assistance by FEMA can be found on FEMA’s website at https://www.fema.gov/disasters . If additional areas are identified by FEMA for individual assistance because of damage related to Hurricane Irma, the relief provided in the Announcement will also apply, from the date specified by FEMA as the beginning of the incident period, and that date should be substituted for references to Sept. 4, 2017, in the Announcement. Plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution, unless the plan administrator has actual knowledge to the contrary. The distributions will be treated as hardship distributions for all purposes under the Code and regs.

For purposes of the Announcement, a “qualified employer plan” means a plan or contract meeting the requirements of Code Sec. 401(a), Code Sec. 403(a) or Code Sec. 403(b) , and, for purposes of the hardship relief, such a plan that could, if it contained enabling language, make hardship distributions. For purposes of this paragraph, a “qualified employer plan” also means a plan described in Code Sec. 457(b) maintained by an eligible employer described in Code Sec. 457(e)(1)(A), and any hardship arising from Hurricane Irma is treated as an “unforeseeable emergency” for purposes of distributions from such plans. For example, a profit-sharing or stock bonus plan that currently does not provide for hardship or other in-service distributions may nevertheless make hardship distributions related to Hurricane Irma pursuant to the Announcement, except from QNEC or QMAC accounts or from earnings on elective contributions. A defined benefit or money purchase plan, which generally cannot make in-service hardship distributions, may not make hardship distributions pursuant to the Announcement, other than from a separate account, if any, within the plan containing either employee contributions or rollover amounts.

The amount available for hardship distribution is limited to the maximum amount that would be permitted to be available for a hardship distribution under the plan under the Code and regs. However, the relief provided by the Announcement applies to any hardship of the employee, not just the types enumerated in the regs, and no post-distribution contribution restrictions are required. For example, regs under Code Sec. 401(k) provide safe harbor hardship distribution standards under which a hardship is deemed to exist only for certain enumerated events, and, after receipt of the hardship amount, the employee is prohibited from making contributions for at least six months. Plans need not follow these rules with respect to hardship distributions for which relief is provided under the Announcement.

To make a loan or hardship distribution pursuant to the relief provided in the Announcement, a qualified employer plan that does not provide for them must be amended to provide for loans or hardship distributions no later than the end of the first plan year beginning after Dec. 31, 2017. To qualify for the relief under the Announcement, a hardship distribution must be made on account of a hardship resulting from Hurricane Irma and be made on or after Sept. 4, 2017, and no later than Jan. 31, 2018. Plan loans made pursuant to the Announcement must satisfy the requirements of Code Sec. 72(p).

In addition, a retirement plan will not be treated as failing to follow procedural requirements for plan loans (in the case of retirement plans other than IRAs) or distributions (in the case of all retirement plans, including IRAs) imposed by the terms of the plan merely because those requirements are disregarded for any period beginning on or after Sept. 4, 2017, and continuing through Jan. 31, 2018, with respect to loans or distributions to individuals described in the above paragraph that begins “As described below,” 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 in the case of IRAs) must make a reasonable attempt to assemble any forgone documentation. For example, if spousal consent is required for a plan loan or distribution and the plan terms require production of a death certificate if the employee claims his or her spouse is deceased, the plan will not be disqualified for failure to operate in accordance with its terms if it makes a loan or distribution to an individual described in the above “As described below” paragraph in the absence of a death certificate if it is reasonable to believe, under the circumstances, that the spouse is deceased, the loan or distribution is made no later than Jan. 31, 2018, and the plan administrator makes reasonable efforts to obtain the death certificate as soon as practicable.

For purposes of the Announcement, “retirement plan” has the same meaning as “eligible retirement plan” under Code Sec. 402(c)(8)(B).

In general, the normal spousal consent rules continue to apply, and, except to the extent the distribution consists of already-taxed amounts, any distribution made pursuant to the relief provided in the Announcement will be includible in gross income and generally subject to the 10% additional tax under Code Sec. 72(t).

IRS notes that the relief that it is currently providing is similar to the relief provided last year to Louisiana flood victims and victims of Hurricane Matthew.

ERISA relief. The Department of Labor has said that it will not treat any person as having violated the provisions of Title I of the Employee Retirement Income Security Act solely because that person complied with the provisions of the Announcement.

Other Harvey- and Irma-related tax relief

Other tax relief that has been granted by IRS to victims of Hurricane Harvey includes:

…providing taxpayers in federal disaster areas with more time to make tax payments and file returns (Weekly Alert ¶  59  09/14/2017);

…encouraging leave-based donation programs for victims of Hurricane Harvey (Notice 2017-48, at Weekly Alert ¶  7  09/07/2017)

…allowing retirement plans to make loans and hardship distributions to storm victims (Ann. 2017-11, 2017-39 IRB, at Weekly Alert ¶  30  09/07/2017);

…providing affected employee benefit plans with additional time to meet certain deadlines (Notice 2017-49, at Weekly Alert ¶  13  09/14/2017) and

…waiving the penalty that would otherwise apply when dyed diesel fuel is sold for use (or used) on the highway (IR 2017-142).

Tax relief that has been granted by IRS to victims of Hurricane Irma includes:

…providing taxpayers in federal disaster areas with more time to make tax payments and file returns (Weekly Alert ¶  59  09/14/2017);

…providing affected employee benefit plans with additional time to meet certain deadlines (Notice 2017-49, at Weekly Alert ¶  13  09/14/2017) and

…waiving the penalty that would otherwise apply when dyed diesel fuel is sold for use (or used) on the highway (IR 2017-149).

IRS has also:

… issued a warning to taxpayers alerting them to possible fake charity scams and encouraging them to seek out recognized groups for their donations (IR 2017-137, at Weekly Alert ¶  41  08/31/2017);

…advised taxpayers on ways to safeguard their records in the event of a disaster (IR 2017-145, at Weekly Alert ¶  1  09/14/2017); and

…provided tips to help taxpayers reconstruct records that were lost during a disaster (Fact Sheet 2017-11).

References: For loans from qualified plans, see FTC 2d/FIN ¶  H-11065; United States Tax Reporter ¶  724.23. For hardship distributions, see FTC 2d/FIN ¶  H-8978.2; United States Tax Reporter ¶  4014.1763.

Ann. 2017-13, 2017-40 IRB; IR 2017-1 51