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The IRS allows plan participants adversely affected by Hurricane Harvey to take hardship   distributions or loans from their retirement plans.

IRS Expands Ability of Retirement Plans to Make Loans, Hardship Distributions to Victims of Hurricanes Harvey and Irma

The IRS announced on August 30, 2017 in Announcement 2017-11 and on September 4, 2017 in Announcement 2017-13 (“Announcement”) that it will allow plan participants who have been adversely affected by Hurricane Harvey to take hardship distributions or loans from their retirement plans even if the plan document does not currently include these provisions and that it is relaxing some of the operational and administrative rules that would normally apply. To be eligible under the Announcements, hardship distributions made on account of a hardship resulting from Hurricane Harvey must be made on or after August 23, 2017 and no later than January 3, 2018 and on or after September 4, 2017 for Hurricane Irma.

Under the Announcement, a qualified retirement plan will not be treated as failing to satisfy any requirement under the Internal Revenue Code (‘IRC’) or regulations due to the plan making a loan or a hardship distribution for a need arising from the hurricane to a participant or former participant whose principal residence on August 23, 2017 for Harvey or September 4, 2017 for Irma was located in one of the counties or Tribal Nations that have been identified as covered disaster areas because of the devastation caused by Hurricane Harvey (See https://www.irs.gov/newsroom/help-for-victims-of-hurricane-harvey for covered disaster areas and other information). The relief also applies to participants whose place of employment was in one of these counties or Tribal Nations on that date or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties or Tribal Nations on that date.

The relief applies to any IRC section 401(a) (including 401(k) plans), 403(a), or 403(b) plan that could, if it contained enabling provisions, make loans or hardship distributions. It also applies to any IRC section 457(b) plan maintained by an eligible employer, and any hardship arising from Hurricane Harvey will be treated as an “unforeseeable emergency” for purposes of distributions from such plans.

Under the Announcement, the IRS states that plan administrators may rely on the representations of the participant or former participant as to the need for and amount of a hardship distribution (unless the plan administrator has actual knowledge to the contrary), and the distribution will be treated as a hardship distribution for all purposes under the IRC and regulations.

The amount available for a hardship distribution is limited to the maximum amount that would be permitted to be available for a hardship distribution from the plan under the IRC and regulations. However, the relief provided by the Announcement applies to any hardship of the participant, not just the types enumerated in the regulations and no post-distribution cessation of contributions are required.

If the plan document does not currently provide for loans and/or hardship distributions, it must be amended to provide for loans and/or hardship distributions no later than the end of the first plan year beginning after Dec. 31, 2017 (December 31, 2018 for calendar-year plans). Finally, a retirement plan will not be treated as failing to follow operational requirements (primarily documentation requirements) for plan loans (in the case of retirement plans other than IRAs) or distributions (in the case of all retirement plans, including IRAs) imposed by the terms of the plan merely because those requirements are disregarded for any period beginning on or after August 23, 2017 for Harvey or September 4, 2017 for Irma and continuing through January 3, 2018, with respect to distributions to individuals covered by the announcement, provided the plan administrator (or financial institution in the case of distributions from IRAs) makes a good-faith effort under the circumstances to comply with those requirements. However, as soon as practicable after making a loan or hardship distribution, the plan administrator (or financial institution in the case of IRAs) must make a reasonable attempt to collect the required documentation related to the loan or hardship distribution.

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1 While the filing of the extended tax return for 2016 is extended, the payment of taxes was due on April 17, 2018, and is therefore not extended.

Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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