IRS Relaxes Loan, Hardship Restrictions for La. Flood Victims
The IRS on Aug. 30 announced a significant relaxation in the restrictions that normally apply to plan loans and hardship distributions to Louisiana flood victims and members of their families.
In Announcement 2016-30
, the IRS says that the following individuals may be eligible to take advantage of these new streamlined loan procedures and liberalized hardship distribution rules:
- participants in 401(k) plans;
- 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.
Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures, according to the IRS.
Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area. To qualify for this relief, hardship withdrawals must be made by Jan. 17, 2017.
The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with what the IRS characterized as “a minimum of red tape.” In addition, 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 Louisiana flood 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.Plan Provisions
The IRS notes that plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. While the amount available for hardship is limited to the amount(s) available under the plan per the Internal Revenue Code and regulations, under these new guidelines, the plan can ignore the reasons 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 as described in the announcement.
A qualified employer plan that does not currently provide for them must be amended to provide for loans or hardship distributions no later than the end of the first plan year beginning after Dec. 31, 2016. To qualify for the relief under this announcement, a hardship distribution must be made due to a hardship resulting from the Louisiana storms and be made on or after August 11, 2016, and no later than Jan. 17, 2017, the IRS says.
Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable. Also, a 10% early withdrawal tax usually applies.