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Earlier today, the IRS announced special relief for retirement plans that wish to grant loans or hardship distributions to participants who are affected by Hurricane Sandy.
Who Is Eligible?
Those participants who lived or worked in one of the federally declared disaster areas on October 26, 2012, are eligible to take loans and hardship distributions to satisfy a need arising due to Hurricane Sandy. A list of the affected areas is available here - http://www.irs.gov/uac/Newsroom/Help-for-Victims-of-Hurricane-Sandy.
What Relief Is Provided?
The requirements that normally apply to loans and hardship distributions are being relaxed in several ways:
- Loans and hardships can be granted to qualifying participants even if the plan does not otherwise allow such transactions. (Note that this does not include defined benefit plans.)
- Plan sponsors can rely on the representations of the participant requesting the loan/hardship even if a more detailed verification process is normally required. This exception does not apply if the sponsor has actual knowledge that the request is not legitimate.
- Hardship distributions under this relief can be granted for any need related to Hurricane Sandy even if it is not one of the regular six allowable hardship reasons.
- Participants who take hardship distributions under this relief are not required to suspend their deferrals for six months following the distribution.
Other limitations such as the accounts available for hardship and the 5-year loan amortization limit continue to apply. Also, hardship distributions continue to be subject to income tax and the 10% early withdrawal penalty (for those participants under age 59 1/2).
Is There A Time Limit?
Yes, loans and hardships under this relief must be made no later than February 1, 2013.
Are There Any Other Requirements?
Sponsors that choose to grant loans or hardship distribution pursuant to this relief even though their plans do not otherwise allow such transactions must adopt an amendment no later than the last day of the 2013 plan year. It is not clear at this point whether plans that allow hardship distributions but restrict them to the six "safe harbor" reasons will be required to amend if they allow hurricane hardships for other reasons.
The actual text of IRS Announcement 20012-44 is available at http://benefitslink.com/src/irs/a-12-44.pdf.
If you have any questions about how this relief may affect your plan, please contact us.
Happy Thanksgiving!
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