September 14, 2017Client Alert

Plan Loan/Hardship Distribution Relief for Hurricanes Harvey and Irma

The laws relating to qualified employer plans impose various limitations on the permissibility of loans and distributions from those plans.  The IRS has responded to the recent natural disasters in Texas and Florida by relaxing the circumstances under which certain retirement plans can make hardship distributions and loans to those impacted by the recent Hurricanes.

Plans Eligible to Provide Relief:

  • Generally, participants of defined contribution plans are covered by this relief. More specifically, plans or contracts meeting the requirements of Code Sections 401(k), 403(a), 403(b), and 457(b) that could, under the law, be amended to allow hardship distributions are covered by this relief. 
  • A defined benefit or money purchase plan, which generally cannot make in-service hardship distributions, may not make hardship distributions pursuant to this new guidance, other than from a separate account, if any, within the plan containing either employee contributions or rollover amounts.

Individuals Eligible for Relief:

  • Employees or former employees whose:
    • principal residence on August 23, 2107 (Harvey)/September 4, 2017(Irma) was located in one of the Texas/Florida counties/areas identified for individual assistance by FEMA; OR
    • place of employment was located in one of these counties/areas on the applicable date; OR
    • parents, children, dependent, or spouse had a principal residence or place of employment in one of these counties/areas on that date.

Relief Available:

  • Hardship distributions and plan loans can be taken on account of the applicable hurricane on or after the applicable dates above and no later than January 31, 2018 (“Relief Period”), regardless of whether the plan document currently allows for loans or hardship distributions them.
    • However, if the plan does not currently allow loans or hardships, the plan must be amended to allow for them no later than the end of the first plan year beginning after December 31, 2017 – i.e., by December 31, 2018.
  • A plan can allow for hardship distributions on account of any hardship of the employee, not just those enumerated in the regulations.
    • This relaxation permits a distribution for purposes of meeting needs not otherwise covered under the Code’s rules.  For example, a distribution generally will not be permissible for food and shelter or assisting family members’ impacted by a natural disaster.
  • Administrators can rely on representations from plan participants regarding the need for and amount of loan or hardship distribution unless the plan administrator has actual knowledge to the contrary.
    • Note: The guidance does not increase the applicable limits on the amount of the plan loan or hardship distributions that may be taken; those rules still apply.
  • A plan’s procedural requirements for plan loans or hardship distributions may be disregarded during the Relief Period, provided the plan administrator makes a “good-faith diligent effort under the circumstances to comply with those requirements” and as soon as practicable thereafter attempts to assemble any forgone documentation.
    • Plan administrators should consider what “good-faith” and “diligent” will look like under their circumstances.
  • Prohibitions on contributions following a hardship distribution (including the 6-month delay set forth in the 401(k) safe harbor) may be disregarded under this guidance.

Ten-Percent Early Withdrawal Penalty and Taxation Still Apply:

  • The guidance specifies that both the 10% early withdrawal penalty and normal income tax rules still apply to hardship withdrawals and plan loans (applicable only if the plan loan results in a taxable distribution).

Amendment Requirement:

  • The guidance does not expressly require an amendment to the plan unless the plan does not currently permit plan loans or hardship distributions.
  • However, best practice would be to adopt an amendment indicating that the plan will be operated in accordance with the relief provided in IRS Announcements 2017-11 and 2017-13 during the Relief Period.  An amendment will likely be required by plan recordkeepers or other service providers to facilitate such “special” loans and/or distributions.

Plans electing to allow their participants to avail themselves of this relief should contact their plan recordkeeper to discuss next steps.  Implementation of a communication strategy may be appropriate to ensure impacted participant who themselves are in dire situations (or who have family in such situations) can get some timely reprieve.

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