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IRS Relief for Retirement Plan Participants Affected by Hurricane Sandy
Practical Law Legal Update 9-522-4967 (Approx. 4 pages)
IRS Relief for Retirement Plan Participants Affected by Hurricane Sandy
by PLC Employee Benefits & Executive Compensation
| Published on 19 Nov 2012 • USA (National/Federal) |
On November 16, 2012, the Internal Revenue Service (IRS) announced that qualified retirement plans under the Internal Revenue Code (IRC) may permit participants to receive a hardship distribution or take a loan from the plan to alleviate financial hardships caused by Hurricane Sandy.
Relief
On November 16, 2012, in Announcement 2012-44 (the Announcement), the IRS announced that a qualified retirement plan under the Internal Revenue Code (IRC) may make a loan or hardship distribution to a plan participant for a financial need arising from Hurricane Sandy. A plan participant qualifies for this benefit if his:
- Principal place of residence on October 26, 2012 was located in one of the counties or Tribal Nations that is a federally declared disaster area.
- Place of employment on October 26, 2012 was located in one of the counties or Tribal Nations that is a federally declared disaster area.
- Lineal ascendant or descendant, dependent or spouse had a principal residence or place of employment on October 26, 2012 in one of the counties or Tribal Nations that is a federally declared disaster area.
The IRS has published a list of locations that President Obama has declared to be covered federal disaster areas due to Hurricane Sandy.
Plan administrators may rely on the participant's representations regarding the need for and amount of a hardship distribution, except if the administrator has actual knowledge to the contrary.
Affected Plans
The Announcement applies to qualified IRC Section 401(a), 403(a) and 403(b) employer-sponsored plans. It also applies to IRC Section 457(b) plans maintained by an eligible employer. Defined benefit and money purchase plans may not make hardship distributions pursuant to the Announcement, unless those plans have separate accounts containing employee rollover contributions.
If an eligible plan does not currently provide for in-service distributions, the Announcement still permits loans and hardship distributions to be made from the plan for any hardship arising from Hurricane Sandy, so long as:
- The distribution is not made from qualified non-elective contributions (QNECs), qualified matching contributions (QMACs) or from earnings on elective contributions.
- The plan is amended to permit the distribution (see Distribution Requirements and Plan Amendments).
Loans and Hardship Distributions
Maximum Hardship Distribution Amount
The hardship distributions allowed under the Announcement may be the maximum hardship distribution amount allowed under the IRC and Treasury Regulations. The hardship distribution relief applies to any hardship suffered by the participant, and not just the types listed in the regulations (such as the safe harbor hardship distribution standards that apply to 401(k) plans). In addition, no post-distribution contribution restrictions are required.
Distribution Requirements and Plan Amendments
A hardship distribution made under the Announcement must be made on or after October 26, 2012 and no later than February 1, 2013. Plan loans made under the Announcement must satisfy the requirements of IRC Section 72(p).
Qualified employer plans that do not allow for loans or hardship distributions must be amended to allow them. This amendment must be made by the end of the first plan year beginning after December 31, 2012 (for a calendar year plan, by December 31, 2013).
Procedural Requirements
The Announcement provides that a retirement plan that does not follow its own procedural requirements for plan loans or hardship distributions (for example, requiring a death certificate as evidence of the death of a family member) will not be penalized if:
- The loan or distribution is made from October 26, 2012 through February 1, 2013 to a participant for a need arising from Hurricane Sandy.
- The plan administrator makes a good faith, diligent effort under the circumstances to comply with the requirements.
- As soon as practicable, the plan administrator makes a reasonable attempt to assemble the necessary documentation.
The normal spousal consent rules will continue to apply during the period lasting from October 26, 2012 through February 1, 2013.