Hurricane Matthew Victims Get a Helping Hand from the IRS

By Sheila Ninneman, J.D.

The Internal Revenue Service (IRS) announced on October 21, 2016 that participants in 401(k) plans, 403(b) tax-sheltered annuities and 457(b) deferred compensation plans may be able to use newly announced streamlined rules to alleviate the financial hardships caused by Hurricane Matthew with loans and hardship distributions. In Announcement 2016-39, the IRS provides that affected plan sponsors will be relieved from normally required verification procedures for loans and hardship distributions in order for participants in areas adversely affected by the massive storm to speed and ease their recovery. Hardship distributions made under this Announcement must be made on or after October 4, 2016 (October 3, 2016 for Florida) and no later than March 15, 2017. For plan loans to qualify for this relief, they must satisfy the requirements of Section 72(p) of the Internal Revenue Code (Code), like any other plan loan.

The affected area and participants

The relief provided in this Announcement is for participants (or their spouse, child, parent, grandparent or dependent) whose principal residence or place of employment on October 4, 2016 (October 3, 2016 for Florida) was in one of the counties identified by the Federal Emergency Management Agency (FEMA) as being eligible for assistance from FEMA. The counties are located in Florida, Georgia, North Carolina and South Carolina and listed at https://www.feda.gov/disasters.

Background

Preliminary to exercising the relief, the qualified plan must already contain language authorizing the loan or distribution, or must be amended to include the language, no later than the end of the first plan year beginning after December 31, 2016. The required language requires procedural rules regarding both hardship distributions and loans. For example, in the case of hardship distributions, the participant must certify the cause of the hardship through certain documentation prior to the distribution, and the cause must be one listed by the plan. In some cases, plan loans cannot be made without first obtaining spousal consent. Under this Announcement, these rules are somewhat relaxed.

Here's the relief

The qualified plan can begin to make distributions or plan loans before it is formally amended to provide for those withdrawals.

The qualified plan can make the hardship distribution or plan loan prior to receiving normally required documentation or consent, as long as the plan makes a reasonably diligent effort afterwards to obtain the documentation (e.g., a death certificate) or consent.

For hardship distributions, the plan can ignore the normal list of accepted causes for hardship distributions, so that the distribution can be used for such needs as food or shelter, unless the plan administrator has actual knowledge that the hardship does not qualify for this relief.

Participants who live outside the impacted area are eligible for this relief in order to assist a spouse, child, parent, grandparent or dependent who lives or works inside the impacted area.

The 6-month ban on elective deferrals will not apply to hardship distributions taken under this Announcement.

Here's what stays the same

Unless the amount distributed consists of already-taxed funds, the amount of the distribution is includible in gross income, and generally subject to the 10% additional tax under Code Section 72(t).

The amount available for distribution must not exceed the maximum amount that would be permitted under the plan under the Code and applicable regulations.

Normal spousal consent rules, if applicable, are not relieved by this Announcement.

Questions? Contact the Findley Davies consultant with whom you normally work or either Sheila Ninneman, J.D. or Jason Rothman, J.D.

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