• Loan and Hardship Distribution Requirements Streamlined for Retirement Plan Participants Impacted by Hurricane Sandy
  • December 4, 2012 | Author: Jonathan A. Kenter
  • Law Firm: Troutman Sanders LLP - New York Office
  • The Internal Revenue Service recently granted relief under IRS Announcement 2012-44 for certain retirement plan participants adversely affected by Hurricane Sandy seeking loans or hardship distributions. A summary of the relief follows:

    Eligible Plans. Eligible plans include account balance plans (e.g., 401(k) plans, profit sharing plans, stock bonus plans, 403(a) plans, 403(b) plans and 457(b) plans covering state and local government employees) and defined benefit or money purchase pension plans (provided that hardship distributions may only be made from a separate account within the plan containing employee contributions or rollover amounts).

    Eligible Participants. The announcement provides that a loan or hardship distribution may be made available to any participant whose principal place of residence or place of employment on October 26, 2012, was located in one of the counties or Tribal Nations identified as a covered disaster area because of the devastation caused by Hurricane Sandy. A loan or hardship distribution may also be made available to a participant having a spouse, child, grandchild, parent or grandparent living or working in a covered disaster area on such date. Plan administrators may rely upon representations from the participant as to the need for and amount of a hardship distribution.

    Duration of Relief. To qualify for the relief under this announcement, a loan or hardship distribution must be made on or after October 26, 2012, and no later than February 1, 2013.

    Account Balance Plan Money Types For Hardship Distributions. Generally, hardship distributions may be made from all money types other than qualified non-elective contribution or qualified matching contribution accounts.

    Relief.

    • A withdrawal may be made for any hardship of the participant arising from Hurricane Sandy¬†-- not just the types of hardships enumerated in the regulations or the plan.
    • The post-distribution contribution limitation that would prohibit a participant from making contributions to the plan for a period of at least 6 months after receipt of the hardship amount need not be imposed.
    • Procedural requirements for loans and hardship distributions (e.g., obtaining spousal consent) have been relaxed until February 1, 2013. However, the plan administrator must make a good-faith diligent effort to comply with these requirements and, as soon as practicable, must make a reasonable attempt to assemble the necessary documentation.
    • Plan loans are still subject to regular loan rules such as (1) a maximum 5-year duration for general purpose loans (and longer durations for principal residence loans), (2) substantially level amortization of principal and interest, (3) a limit of $50,000 or one half of the participant‚Äôs account balance and (4) that the loan is evidenced by a legally enforceable agreement.
    • An eligible retirement plan need not currently include authorizing language necessary to permit loans and hardship distributions. Plans taking advantage of this relief must be amended to provide for loans or hardship distributions no later than the end of the first plan year beginning after December 31, 2012.