On August 30, 2017, in Announcement 2017-11, the IRS provided retirement plan loan and distribution relief from retirement plans described in Code Sections 401(a) (including 401(k) plans), 403(a), 403(b), and governmental eligible deferred compensation plans described in 457(b) (collectively “Retirement Plans”) to affected participants.
An affected participant includes an employee or former employee whose principal residence or place of employment on August 23, 2017, was located in one of the Texas counties identified for individual assistance by the Federal Emergency Management Agency (“FEMA”) because of the devastation caused by Hurricane Harvey or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties on that date. The counties identified for individual assistance by FEMA can be found on FEMA’s website at https://www.fema.gov/disasters. (As additional areas in Texas or other states (including parishes in Louisiana) are identified by FEMA for individual assistance because of Hurricane Harvey damage, the same relief will also apply, from the date specified by FEMA as the beginning of the incident period, and that date should be substituted for references to August 23, 2017.)
This Retirement Plan relief is in addition to the relief already provided by the IRS in News Release IR-2017-135, which generally gives affected taxpayers until January 31, 2018, to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; employment and certain excise tax returns; and the filing of Form 5500 series returns), that have either an original or extended due date occurring on or after August 23, 2017, and before January 31, 2018.
Specifically for Retirement Plan loans and distributions on account of Hurricane Harvey, Announcement 2017-11 provides for their availability even if the Retirement Plan does not specifically provide for them currently, as well as providing relief from certain procedural or verification procedures otherwise generally required under Retirement Plans with respect to loans and hardship distributions.
The Announcement provides that plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution, unless the plan administrator has actual knowledge to the contrary. The distribution made upon such representation is treated as a hardship distribution for all purposes under the Code and regulations.
Announcement 2017-11 further provides that Retirement Plans can disregard the reasons that normally apply to hardship distributions and may make a distribution to a participant on account of any hardship of the participant relating to Hurricane Harvey (meaning the affected participants can use the hardship distributions for food, shelter, etc.). Additionally, the six-month prohibition on elective deferrals to a Retirement Plan by a participant taking a hardship distribution will be waived.
Retirement Plans that do not currently allow participants to take loans and/or hardship distributions will be allowed to provide loans and/or hardship distributions prior to the formal adoption of any amendments allowing them. However, Retirement Plans must be amended to provide for the loans and/or hardship distributions no later than the end of the first plan year beginning after December 31, 2017.
However, it is important to be aware of a few key items:
- unless the amounts distributed have already been taxed, the distributed amount will be included in gross income and will be subject to the 10% additional tax, if otherwise applicable
- the amounts available for loans and distribution must not exceed the maximum amount that would be permitted under the Retirement Plan or under the Code and the applicable regulations
- other Code and ERISA loan requirements, such as the length of the term of the loan, repayment rules, interest and security requirements and default rules continue to apply
- the normal spousal consent rules, if applicable, will still apply
- as soon as practicable, the plan administrator of the Retirement Plan must make a reasonable attempt to assemble any forgone documentation
Finally, loan or hardship distributions from a Retirement Plan account to the plan participant must occur on or before January 31, 2018 to qualify for the relief authorized in this Announcement.
If you have any questions or want more information about Announcement 2017-11, please contact Randye Snyder or Michael Williams.