Hurricane Sandy victims can take hardship distributions, loans from retirement plans

The IRS on Friday announced that it will allow taxpayers who have been adversely affected by Hurricane Sandy to take hardship distributions or loans from their retirement plans (Announcement 2012-44). To qualify under the announcement, hardship distributions made on account of a hardship resulting from Hurricane Sandy must be made on or after Oct. 26, 2012, and no later than Feb. 1, 2013.

Under the relief provisions announced, 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 Sandy to an employee or former employee whose principal residence on Oct. 26, 2012, 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 Sandy. The relief also applies to employees 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 IRS says plan administrators may rely on representations from the employee or former employee 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 Code and regulations.

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

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

To make a loan or hardship distribution, a qualified employer plan that does not 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, 2012.

Under the announcement, 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 Oct. 26, 2012, and continuing through Feb. 1, 2013, with respect to distributions to individuals described 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.

—Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.