Memo – Hurricane Victims May Qualify For Hardship Loans and Distributions From Retirement Accounts

RED BANK NJ —The Internal Revenue Service today announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricanes Harvey and Irma and members of their families.

Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster areas affected by Hurricanes Harvey and Irma and designated for individual assistance by the Federal Emergency Management Agency (FEMA). For a complete list of eligible localities, visit https://www.fema.gov/disasters. To qualify for this relief, hardship withdrawals must be made by Jan. 31, 2018.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a victim of Hurricanes Harvey and Irma to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in Announcement 2017-13.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10-percent early-withdrawal tax.

Further details are in Announcement 2017-13, posted today on IRS.gov. More information about other tax relief related to Hurricanes Harvey and Irma can be found on the IRS disaster relief page. For information on government-wide relief efforts, visit www.USA.gov/hurricane-irma.

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2017-10-08T09:33:02+00:00

About the Author:

I’m Chris Whalen, CPA. For over twenty-five years I have been the owner and Managing Member of a Certified Public Accounting and Business Advisory firm providing a full range of income tax, accounting and advisory services for individuals and businesses. I am licensed in all states and serve clients throughout the country but extensively in Red Bank, Middletown, Rumson, Colts Neck, Holmdel, Monmouth County and Ocean County.