The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in New York is representative of a common inquiry related to relief for Hurricane Sandy victims. The advisor asked:
“Has the government issued any special qualified plan-related guidance for victims of Hurricane Sandy?”
Yes, the most recent guidance from the IRS for Hurricane Sandy victims came in the form of Announcement 2012-44, which relaxed the procedural requirements for obtaining plan loans and hardship distributions from qualified plans for affected individuals and certain members of their families. It did not waive the 10% early withdrawal penalty that may apply to distributions taken before age 59-1/2, unless there is another qualifying exception.
Pursuant to the guidance, the IRS will not disqualify a qualified plan (defined as a plan under Section 401(a), 403(a), 403(b) or governmental 457(b) plans) merely because the plan makes a loan or a hardship distribution for a need arising from Hurricane Sandy to an employee or former employee whose:
• principal residence on Oct. 26, 2012, was located in the covered disaster areas;
• place of employment was located in the covered disaster area; or
• lineal ascendant or descendant, dependent or spouse had a principal residence or place of employment in the covered disaster area on that date.
In order to qualify for the relief, a hardship distribution must be made on or after Oct. 26, 2012, and no later than Feb. 1, 2013.
Plan loans made pursuant to this announcement must satisfy the requirements of Code Section 72(p) (e.g., such as the five-year repayment requirement (unless eligible for the home loan exception) and the maximum loan limit).
The amount available for hardship distribution is limited to the maximum amount that otherwise would be permitted under current IRS rules and regulations, with the following exceptions: any hardship of the employee qualifies, not just those prescribed in the regulations; and no post-distribution contribution restrictions are required (i.e., no six-month suspension of employee salary deferrals). For governmental 457(b) plans, any hardship arising from Hurricane Sandy is treated as an “unforeseeable emergency” for purposes of such distributions.
Plan sponsors whose plans do not provide for loans and/or hardship distributions must amend their plans in order to make them available if that is their intent. The deadline for amending is no later than the end of the first plan year beginning after Dec. 31, 2012.
Plan administrators may disregard usual loan and distribution procedural requirements during the period beginning on Oct. 26, 2012, through Feb. 1, 2013, provided they make a good-faith, diligent effort to comply with any such requirements as soon as practicable after the period.
Conclusion
The IRS has issued several pronouncements that provide tax-related relief measures for victims of Hurricane Sandy. Announcement 2012-44 specifically reduces the red tape around obtaining hardship distributions and plan loans for affected individuals. Financial advisors who stay current with these changes are better situated to serve their clients.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2012 Columbia Management Investment Advisers, LLC. Used with permission.
