In Announcement 2017-11, the IRS relaxed standards for hardship distributions and loans from qualified retirement plans for those affected by Hurricane Harvey. This relief applies to employees or former employees and their family members who live or work in the disaster areas designated for individual assistance by the Federal Emergency Management Agency (“FEMA”).
The Announcement provides for the following relief:
- Relaxes the administrative rules that apply to hardship distributions by permitting plan administrators to rely on a participant’s representations regarding the need for, and the amount of, the hardship distribution unless the plan administrator has actual knowledge to the contrary.
- Permits hardship distributions for Hurricane Harvey-related needs for family members, including parents, children and spouses.
- Allows a participant to continue to make contributions to the plan after receiving a hardship distribution. The six-month delay on making contributions that typically applies will not apply for Hurricane Harvey hardship distributions.
- Relaxes the procedural requirements for making plan loans relating to Hurricane Harvey relief until January 31, 2018, as long as the plan administrator makes a good faith diligent effort to follow the plan loan procedures under the circumstances. For example, if spousal consent is required for a plan loan and the plan terms require a participant to produce a death certificate, a plan will not be disqualified if the loan is made without the death certificate as long as the plan administrator makes reasonable efforts to obtain the death certificate as soon as possible.
Timing of Plan Amendments
Plan loans and hardships for Hurricane Harvey relief may be provided now, even if the plan does not currently provide for loans and hardships as long as the plan is amended to allow for loans or hardships no later than the end of the first plan year beginning after December 31, 2017 (i.e., December 31, 2018 for calendar year plans).
Tax Treatment of Loans and Hardships is Unchanged
The IRS made clear that this Announcement does not change the tax treatment of loans or hardship distributions. In general, loans are tax free if they are repaid over a period of five years or less. Hardship withdrawals are generally taxable and subject to a 10% early withdrawal tax.
Hurricane Irma Relief
The relief in Announcement 2017-11 does not apply to those affected by Hurricane Irma, but the Service may issue guidance in the future with respect to those impacted by Hurricane Irma.