IRS Provides Relief to Louisiana Flooding Victims; Retirement Plans Allowed to Make Loans and Hardship Distributions to Flood Victims (IR-2016-115; Ann. 2016-30)

CCH Tax Day Report

The IRS has announced relief for victims of recent storms and flooding in Louisiana that began on August 11, 2016. The relief is aimed at persons who have retirement assets in qualified employer plans that they want to use to alleviate hardships caused by the Louisiana storms. Employer-sponsored retirement plans, including 401(k)s, can make loans and hardship distributions to flood victims and their family members. Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) sheltered annuities, and state and local government employees with 457(b) deferred compensation plans may be eligible to take advantage of streamlined loan procedures and liberalized hardship distribution rules. Although IRA participants cannot take out loans, they may still be able 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 the disaster area. Hardship withdrawals must be made by January 17, 2017, in order to qualify for this relief.

In addition, the IRS is also relaxing procedural and administrative rules that would ordinarily apply to loans from retirement plans and hardship distributions. Eligible retirement plan participants will be able to access their money more quickly. Further, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

Comment: A retirement plan can allow a flood victim to take a hardship distribution or borrow an amount up to the statutory limit from the victim’s retirement plan. Also, a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a child or other dependent who lived or worked in the disaster area. Retirement plans will be able to make loans or distributions before the plan is formally amended to provide for such features. The plan can ignore the reasons that normally apply to hardship distributions, which will allow such distributions to be used, for example, for food and shelter. If documentation is required by the plan prior to making a distribution, the plan can relax this requirement.

Normal spousal consent rules are applicable. Also, except to the extent that the distribution is made up of already-taxed amounts, a distribution made pursuant to this relief will be includible in gross income and generally subject to the 10-percent additional tax under Code Sec. 72(t)

The Department of Labor has stated that it will not treat a person as having violated Title I of the Employee Retirement Income Security Act of 1974 (ERISA) (P.L. 93-406) solely because the person complied with the provisions of the announcement.

IR-2016-115

Announcement 2016-30, 2016FED ¶46,399

Other References:

Code Sec. 72

CCH Reference – 2016FED ¶6140.775

Code Sec. 401

CCH Reference – 2016FED ¶18,112.10

CCH Reference – 2016FED ¶18,112.33

Code Sec. 403

CCH Reference – 2016FED ¶18,282.393

Code Sec. 457

CCH Reference – 2016FED ¶21,536.24

Tax Research Consultant

CCH Reference – TRC RETIRE: 3,302

CCH Reference – TRC RETIRE: 9,354

CCH Reference – TRC RETIRE: 42,800

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