On November 16, the IRS released guidance intended to assist individuals impacted by Hurricane Sandy by providing access to certain retirement funds. Under the guidance, 401(k) plans and similar employer-sponsored retirement plans (including 403(b) plans and, in the case of plans maintained by governmental employers, 457(b) plans) can make loans and hardship distributions to victims of Hurricane Sandy and members of their families.
The Internal Revenue Code generally contains strict rules governing when and how a hardship distribution can be made. Under the guidance released on Friday, the IRS has clarified that a distribution to a qualified participant (described below) to meet needs arising from Hurricane Sandy will not run afoul of those rules. The guidance also relaxes the “red tape” typically involved in obtaining a plan loan or distribution from a plan.
Under the relaxed rules, a plan loan can be made by making a “good-faith diligent effort under the circumstances” to comply with the generally-applicable procedural requirements so long as, as soon as practicable, the plan administrator makes a reasonable attempt to assemble any forgone documentation.
In the hardship distribution context, this means that a plan administrator can rely solely on a representation from the participant as to the need for and the amount of a hardship distribution (that is, unless the plan administrator has actual knowledge that the participant’s representation is incorrect). Plans are also not required to impose the typically required six month delay on making elective deferrals following receipt of a hardship distribution received on account of Hurricane Sandy.
In order to qualify for the relief, a retirement plan participant or his/her son, daughter, grandchild, parent, grandparent, spouse or other dependent must have either lived or worked in a covered disaster area on October 26, 2012. Covered disaster areas include those “federally declared disaster areas [listed] in the News Releases issued by the IRS for Victims of Hurricane Sandy”. This list is available here
While a plan does not need to be amended before it can make a loan or hardship distribution under this guidance, it must be amended by no later than the end of the first plan year beginning after December 31, 2012 (i.e., by December 31, 2013 for calendar year plans).
NOTE – To qualify for this special relief, a hardship distribution must be made by no later than February 1, 2013.