New IRS Rules On Hurricane Victims & Retirement

401(k) and similar employer-sponsored retirement plans can make loans and hardship distributions

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On November 16, 2012, the Internal Revenue Service issued Announcement 2012-44 in an effort to bring relief to those people that were impacted by Hurricane Sandy. The Service announced that 401(k) and similar employer-sponsored retirement plans could make loans and hardship distributions to employee victims of Hurricane Sandy and certain members of their families. Said distributions must be made on or after October 26, 2012 and no later than February 1, 2013.

This can be a much-needed source of additional funds for those impacted by the disaster that either live or work in the designated disaster areas in New York, Connecticut, New Jersey and Rhode Island. The plans in question include 401(k) plans, 403(b) tax sheltered annuities of employees of public schools and tax-exempt organizations as well as 457(b) deferred compensation plans for state and local government employees. Participants of those plans may be eligible for loans and hardship distributions from their plans. In the case of IRA’s, which do not allow for loans, participants may qualify to receive distributions under greatly simplified procedures. Plans under 457(b) generally may not make loans unless the participant is faced with an “unforeseeable emergency”. This rule defines Hurricane Sandy as a qualified “unforeseeable emergency”, thereby allowing for a hardship distribution. The purpose is to get much-needed funds to those who are in immediate need as easily and with as few red-tape procedures as possible.

Normally there is a six-month ban on 401(k) and 403(b) contributions on participants that take hardship distributions, but under Announcement 2012-44, this ban will not apply. If an employer plan does not currently have a hardship provision written into their plan, the time for them to amend their plan will be extended until no later than the end of the first plan year beginning after December 31, 2012. The usual documentation procedures that a Plan Administrator requires relating to a hardship request has been relaxed under 2012-44, allowing for the Plan Administrator to make a good-faith, diligent effort under the circumstances to comply with the paperwork requirements and every reasonable attempt to assemble any documentation not originally compiled at the time of the distribution.

This taxpayer relief, which allows a Sandy victim to take a hardship distribution or to borrow up to the statutory limits from their retirement plan, extends beyond just the participant. It also allows a person who lives outside the disaster area to take out a retirement plan loan or hardship distribution and use it to assist a spouse, son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions (except to the extent a distribution consists of already-taxed amounts) are generally taxable and a 10% early-withdrawal tax usually applies. Similar rules regarding IRA distributions relating to income inclusion and taxation apply.

The government is providing this immediate relief to all taxpayers that have been impacted by Hurricane Sandy. There have been several News Releases issued by the IRS for Victims of Hurricane Sandy, which can be found at http://www.irs.gov/uac/Newsroom/Help-for-Victims-of-Hurricane-Sandy. Any individual or business that has been impacted by this storm should seek out this site, as there are several IRS relief provisions available to you, including the extension of various tax return filing and tax payment deadlines. The impacted states are also offering various forms of relief. Be sure to contact your tax professional as soon as possible to learn what relief is available to you.

Sandra Napoleon-Hudson is the managing member of Sandra Napoleon-Hudson CPA LLC, based in Atlanta. Her expertise includes multi-state taxation for corporations, partnerships and individuals, business consulting, sports and entertainment taxation and IRS representation. As a former partner of a New York firm, she appeared frequently on television and in print media.