In Announcement 2017-11 the IRS has provided special provisions to allow qualified employer retirement plans to make Hurricane Harvey related distributions and/or loans.
The general relief is described in the notice as follows:
…[A] qualified employer plan will not be treated as failing to satisfy any requirement under the Code or regulations merely because the plan makes a loan, or a hardship distribution for a need arising from Hurricane Harvey, to an employee or former employee whose principal residence on August 23, 2017, was located in one of the Texas counties identified for individual assistance by the Federal Emergency Management Agency (“FEMA”) because of the devastation caused by Hurricane Harvey or whose place of employment was located in one of these counties on that applicable date or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties on that date.
The counties identified for assistance covered by this announcement can be found at https://www.fema.gov/diasters. Since Harvey continues to impact additional areas, the announcement also provides that any new areas added by FEMA to that list will also be eligible for relief, though with the date that the relief begins changed from August 23, 2017 to the date those new areas are added as of the beginning of the “incident period” noted in the FEMA documents.
The announcement provides for liberal rules on hardship distributions. The distribution amount would be limited to the maximum amount that would be available for a hardship distribution under the Code and regulations. However, the distribution is available to eligible individuals adversely affected by Hurricane Harvey who wish to use assets in qualified employer plans to alleviate hardships caused by Hurricane Harvey. This means that such a distribution applies to any hardship of the employee, not just the types listed in the regulations. As well, no post-distribution contribution restrictions are required. Normally an employee taking a hardship distribution is prohibited from making contributions for at least 6 months after the distribution, but that rule will not apply for Harvey related hardship distributions.
The plan administrator can rely upon the representations of the participant about the need for and amount of the Harvey related hardship distribution unless the administrator has actual knowledge to the contrary.
While the plan must be of a type that would be eligible to offer hardship distributions, the plan language does not need to provide currently for hardship distributions to make them under this relief. So, for instance, a profit sharing or stock bonus plan could make a hardship distribution under this relief regardless of whether it contained hardship distribution language. However, plans prohibited from making hardship distributions by the law cannot make them under this rule—that would include a defined benefit or money purchase pension plan except for assets in such a plan that are in a separate account within the plan containing employee contributions or rollover contributions.
The maximum hardship distribution is limited to the maximum amount that would be allowed under the law if the plan had language allowing for a hardship distribution.
While the language allowing for hardship distributions or loans does not need to be in the plan document currently, the plan must be amended to provide for them no later than the end of the first plan year beginning after December 31, 2017. A hardship distribution under this relief provision must be made:
- On account of a hardship arising from Hurricane Harvey
- Be made on or after August 23, 2017 and
- Be made no later than January 31, 2018
Plan loans under this provision must satisfy the requirements of IRC §72(p). Thus, the loans must meet the $50,000 maximum amount rule found at IRC §72(p)(2)(A)(i), taking into account any other plans loans taken out by the participant during the relevant one year period or, if less, the greater of ½ of the present value of the employee’s nonforfeitable accrued benefit or $10,000 per IRC §72(p)(2)(A)(ii).
Special relief is granted for procedural rules as described below:
In addition, a retirement plan will not be treated as failing to follow procedural 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, and continuing through January 31, 2018, with respect to loans or distributions to individuals described in the first paragraph under “Relief”, above, provided the plan administrator (or financial institution in the case of distributions from IRAs) makes a good-faith diligent effort under the circumstances to comply with those requirements. However, as soon as practicable, the plan administrator (or financial institution in the case of IRAs) must make a reasonable attempt to assemble any forgone documentation. For example, if spousal consent is required for a plan loan or distribution and the plan terms require production of a death certificate if the employee claims his or her spouse is deceased, the plan will not be disqualified for failure to operate in accordance with its terms if it makes a loan or distribution to an individual described in the first paragraph under “Relief” in the absence of a death certificate if it is reasonable to believe, under the circumstances, that the spouse is deceased, the loan or distribution is made no later than January 31, 2018, and the plan administrator makes reasonable efforts to obtain the death certificate as soon as practicable.
Note that the taxation of such distributions to the participant is not changed by these rules. As the announcement warns:
Taxpayers are reminded that in general the normal spousal consent rules continue to apply, and, except to the extent the distribution consists of already-taxed amounts, any distribution made pursuant to the relief provided in this announcement will be includible in gross income and generally subject to the 10-percent additional tax under § 72(t).
Similarly, if the participant takes out a loan, the same rules that lead to a deemed distribution equal to the balance of the loan based on certain uncorrected failures to comply with the loan requirements would also continue to apply.
The announcement concludes by noting that the Department of Labor that it will not treat any person as violating the provisions of Title I of the Employment Retirement Income Security Act because that person complied with the provisions of this announcement