Disaster tax relief updates

 

New relief for victims of hurricanes Harvey and Irma and their family members – faster access to 401(k) and 403(b) hardship withdrawals.

In the wake of these two catastrophic hurricanes, the IRS has offered extra flexibility for plan sponsors and participants that should streamline hardship withdrawals from 401(k) or 403(b) plans and loans from retirement plans and IRAs.

This new IRS relief will allow plan administrators to process hardship withdrawals for victims of the hurricanes or their immediate family members even if the plan does not currently allow hardship withdrawals. If your plan does allow such withdrawals, the IRS will allow you to forego some of your plan’s usual documentation rules.

Here are the details:

  1. This relief applies to participants who lived or worked in one of the counties identified by FEMA as a hurricane Harvey or Irma disaster area, or to a parent, child, or spouse of a person who lived or worked in a Harvey or Irma disaster area, as of the “incident date” noted by FEMA. FEMA’s list of disaster areas is here.
  2. A plan administrator may allow hardship withdrawals even if there is no language in the plan authorizing hardship withdrawals. In that case, your plan must be amended by the end of the first plan year beginning after December 31, 2017, but distributions may begin immediately.
  3. Plan administrators may rely on the representation of the participant on the need for the money – no need to require further documentation proving hardship.
  4. Withdrawal funds may be used in ways not usually allowed by regulations, including for food and shelter.
  5. Plans that impose certain procedural requirements for hardship withdrawals or for plan loans – such as documentation requirements, particular claim forms, etc – do not have to follow those procedures between August 23, 2017 (for Harvey) and September 4 (for Irma) and January 31, 2018, for all withdrawals and loans that are requested for hurricane relief. As long as it is “reasonable to believe” the participant, the plan may allow for a streamlined process and forego documentation. The plan administrator should make reasonable efforts to assemble any necessary documentation later, when practical.
  6. Spousal consent rules still apply (though if procedures require a death certificate, immediate production of the certificate is flexible under this relief).
  7. Participants who receive hardship withdrawals will not be prohibited from continuing to contribute to their retirement plan. Normally, there is a 6 month bar on contributions after a hardship withdrawal.
  8. Note that hardship withdrawals will be taxed as normal, which means they are includible in gross income and subject to the 10% early withdrawal tax.

Read all the details in the IRS Notice 2017-11 here for Harvey and here for Irma. You can also read about the IRS’s program to allow more flexible use of donated PTO for Harvey victims, which we discuss here.  We will keep you updated if the IRS announces more relief!

 

Latest updates: Check here for the IRS hurricane relief page. There is some relief – generally in the form of extended deadlines – for individuals and businesses in Puerto Rico and the U.S. Virgin Islands, as well as advice on reconstructing tax records.