Retirement Plan Loans and Hardship Distributions – Hurricane Harvey Relief

Take-Away: In response to the devastation caused by Hurricane Harvey, the IRS revised many of its rules to make it easier for victims who live in a large part of Texas to access their retirement assets.

• Loans and Hardship Withdrawals: The relaxed rules apply to plan loans and hardship distributions. You will recall however that there can be no loans from an IRA, so the ability to access retirement assets through a loan is restricted to qualified plans like 401(k) accounts and ‘similar’ retirement plans like 403(b) [school employees and employees of non-profits] and 457 plans [governmental employees.] In short, a victim can take a hardship distribution from their plan account or IRA, or borrow from their retirement plan account up to specified statutory limits.
• Who Is Covered? Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area affected by Harvey and who have been designated for individual assistance by FEMA. Consequently, an individual who resides outside the disaster area can still access their retirement funds via a loan or hardship distribution for the financial assistance of a son, daughter, parent, grandparent or other dependent who either resides or works in the disaster area.
• Disaster Area: The Texas Counties with the FEMA designation can be located at http://www.fema.gov/disasters.
• Deadline: Any hardship withdrawals must be taken by January 31, 2018 in order to qualify for this expedited relief.
• Red Tape Relief: The IRS has streamlined some of the rules and regulations that must otherwise be followed for either a plan loan or a hardship distribution. The IRS has also expanded, i.e. liberalized, the definition of what constitutes a Thus, while loans cannot be taken from an IRA, it is still possible for a hardship distribution from an IRA for these purposes. The obvious intent behind the of ‘cutting of the red tape’ is to make it easier for plan participants to access their retirement funds more quickly.
• Relief on Contribution Ban: Normal IRS rules prohibit future contributions to a 401(k) or 403(b) plan for six months if there has been a hardship distribution. This ban has been suspended if a hardship withdrawal has been taken under this special relief rule.
• Taxes: The tax treatment of distributions will remain the same however. Under current law, hardship distributions are generally taxable and also subject to the 10% early withdrawal penalty. A plan loan is generally not taxable if it is repaid over a period of 5 years or less.
• Plans: Plans will be permitted to make loans or hardship distributions before the plan is formally amended to provide for such features. Plans can also ignore the reasons that normally apply to hardship distributions, in order to allow them to be used for purposes that normally do not qualify for a hardship distribution, e.g. food and shelter. Similarly, if the existing plan requires some form of documentation before a hardship distribution can be authorized, the qualified plan administrator can relax this condition.

More information can be gained in IRS Announcement 2017-11.