In light of the devastating storms that hit Texas this week, the IRS issued guidance that provides some relief to the victims of Hurricane Harvey. As it did last year for Hurricane Matthew victims, the IRS is permitting 401(k) plans and similar employer-sponsored retirement plans to make loans and hardship distributions to those affected (and to certain family members of those affected) by Hurricane Harvey.
Under this IRS guidance, a participant who resided in one of the Texas counties identified by FEMA on August 23, 2017 may receive a hardship distributions for any reason, and not just those reasons enumerated in the regulations or the plan document. The amount available is still limited to the maximum amount that would be permitted under the regulations and plan. Further, plan sponsors do not need to follow the general procedural requirements for plan loans or distributions imposed by the law or the plan during this period of time for those in impacted areas. These same rules apply to participants whose place of employment was located in one of these areas 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 recent IRS guidance does not require employers to amend their plans prior to allowing these distributions or loans. An employer who wishes to provide this relief to its employees must amend its plan document no later than the end of the first plan year beginning after December 31, 2017 (i.e., by December 31, 2018 for a calendar year plan).
Importantly, while the recent IRS guidance provides some flexibility for plans to make hardship distributions and loans, it does not eliminate the 10% penalty for early distributions. Further, distributions made under this IRS announcement are includable as gross income, which may further increase a participant’s cost of accessing money in his or her retirement plan. Although such concerns might be secondary to the more immediate needs of the victims of Hurricane Harvey, participants should be aware of the potential penalties and adverse tax consequences of taking such distributions.
To determine if a participant is eligible for the current relief, visit https://www.fema.gov/disasters for a complete list of eligible counties. This relief, which began on August 23, 2017 is only available for distributions and loans that occur on or before January 31, 2018.