On November 16, 2012, the IRS issued Announcement 2012-44 to liberalize the rules for loans and hardship withdrawals from qualified retirement plans to taxpayers affected by Hurricane Sandy. The special relief will apply to loans and distributions made between October 26, 2012, and February 1, 2013.
Those participants eligible for this special relief are active and former employees whose principal residence or place of employment on October 26, 2012, was within the federally-declared disaster area. The relief also extends to participants who have a parent, grandparent, child, grandchild, dependent or spouse who had a principal residence or place of employment within the disaster area on that date.
The liberalized hardship withdrawal rules extend only to those plans that, by law, may provide for hardship distributions. This would include 401(k) plans, 403(b) plans, and governmental 457(b) plans, but not pension plans.
Relaxed hardship requirements
By regulation, hardship withdrawals normally are limited to a list of enumerated financial hardships, and participants are prohibited from making additional deferral contributions for a period of six months following receipt of a hardship withdrawal. However, plans are relieved of these constraints with respect to hardship distributions made under the Announcement. The relief is provided for any hardship of the employee, and no post-distribution contribution restrictions are imposed.
Extended compliance period
Loans and hardships emergency distributions may be made during the relief period even if the plan does not then include appropriate provisions. Such a plan must be amended to add the necessary provisions, but the amendment will be considered timely as long as it is adopted by the end of the first plan year beginning after December 31, 2012.
In addition, the IRS will not treat a plan as failing to follow its terms because a loan or distribution is made to a participant eligible for relief without complying with the procedural requirements specified by the plan. The guidance requires only that the plan administrator make what, under the circumstances, is a “good faith diligent effort” to secure the normal documentation as soon as practical after the loan or distribution has been made.
Apart from the relaxed procedural and documentation requirements, all of the normal terms and conditions (amount, duration, interest rate, etc.) apply to loans. The participants who receive hardship or emergency distributions will be subject to the normal tax consequences associated with those disbursements. These include ordinary income taxes and, when applicable, the 10 percent early distribution excise tax.
A parallel announcement issued by the Department of Labor on November 20, 2012, grants relief from certain failures that otherwise might be deemed to be a fiduciary breach or prohibited transaction. These include failures to timely deposit 401(k) deferrals, provided that the failure is attributable to Hurricane Sandy and that the failure is remedied as soon as practicable under the circumstances.
Source: For Your Benefit