Employee Benefits-IRS Announces That Retirement Plans Can Make Loans, Hardship Distributions to Hurricane Sandy Victims

In IR-2012-93, the Internal Revenue Service (the “IRS”) announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Sandy and members of their families. The IRS said that, under this relief, 401(k) plan participants, employees of public schools and tax-exempt organizations with 403(b) tax-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.

Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area (such as Nassau or Suffolk County). To qualify for this relief, hardship withdrawals must be made by Feb. 1, 2013.The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. The six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area. Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the limits that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement under certain rules.

Details on this relief may be found in Announcement 2012-44. Relief from certain tax return filings and tax payment deadlines may be found in IR-2012-83.