The IRS has issued Announcement 2005-70 in which it announces relief for retirement plan distributions and loans to taxpayers affected by Hurricane Katrina.
Expansion. The IRS will not treat a retirement plan that makes a hardship (or, unforeseeable emergency) distribution or a loan for any need arising from Hurricane Katrina as failing to comply with any plan, statutory or regulatory requirement. The relief thus expands the hardship events to any need arising from Hurricane Katrina. This expansion also applies to the safe harbor hardship distribution rules. A plan using the safe harbor hardship rules may make a hardship distribution for a need arising from Hurricane Katrina irrespective of whether the need is one of the enumerated “safe harbor” events. Furthermore, if the plan makes a hardship distribution because of a need arising from the hurricane, the plan does not need to suspend the participant’s deferrals for six months. The plan administrator also may rely on the employee’s representation as to the need for the distribution and as to the amount, unless the administrator has actual contrary knowledge. The relief only applies to hardship distributions (and presumably also to loans) made after August 28, 2005, and no later than March 31, 2006. The relief for the loans does not extend to the taxation requirements under Code §72(p). In other words, the loan must continue to satisfy all of the taxation rules, including the time and amount limitations.
Plan Provisions. The relief permits a plan that currently does not include a hardship or loan provision (or a plan which has provisions which are not as broad), nevertheless, to make a loan or hardship distribution. However, an employer that makes a hardship distribution or a loan without the enabling language in the plan must amend its plan no later than the end of the first plan year beginning after December 31, 2005. Note: The Announcement makes no mention as to how such an amendment would affect the status of a prototype or volume submitter document. However, in light of the current situation, we expect the IRS to be lenient on this issue.
Procedural Requirements. The relief also permits the plan to disregard certain procedural requirements in making plan distributions to Hurricane Katrina victims provided the plan administrator makes a good faith effort to comply with the requirements. For example, if a plan to make a distribution requires a participant to provide a death certificate where the spouse is deceased, the plan will not violate its terms by distributing without the certificate if the plan (1) makes the distribution by March 31, 2006,, (2) reasonably believes the spouse is deceased, and ((3)makes reasonable efforts to obtain the foregone documentation as soon as practical.
Application. The relief applies to any employee or former employee whose principal residence or place of employment on August 29, 2005, was located in one of the counties or parishes in Louisiana, Mississippi or Alabama that FEMA has or in the future designates as Hurricane Katrina disaster areas. The relief also applies if certain relatives of the employee or former employee on that date had their principle residence or place of employment in these areas. These relatives include: the spouse and any dependent, lineal ascendant or lineal descendent of the employee or former employee.
Available Plan Sources. The relief does not expand the account sources available for hardship distribution. For example, a plan still may not make hardship distributions from QNECs (and earnings), QMACs (and earnings), safe harbor 401(k) contributions (and earnings), and earnings on elective deferrals. Furthermore, neither a defined benefit plan nor a money purchase plan may permit hardship distributions, other than from the portion of the plan that includes rollovers or after-tax employee contributions.
Plans Affected. The relief applies to a qualified plan, 403(b) plan or a governmental 457(b) plan. The relief as to the procedural requirements also applies to IRAs.
DOL in Accord. The DOL has advised the IRS that it will not assert any violation of Title I of ERISA solely because a plan complied with the relief set out in Announcement.2005-70.
Example. Bill, a resident of New Orleans, participates in a 401(k) plan (calendar year) that uses the safe harbor hardship rules. Bill requests a hardship distribution from his 401(k) plan for food, clothing, temporary housing, utilities, etc. Although the plan does not provide for distribution on account of the events for which Bill is requesting hardship distribution, the plan may make the distribution. The employer would need to amend the plan no later than December 31, 2006 to add the events to its hardship provision. The employer might amend its plan to provide for a “Katrina-related hardship distribution under Announcement 2005-70” in lieu of amending to spell out the specific hardship needs.
Example. Assume the same facts as in the previous example except Bill has a $20,000 account balance that includes $5,000 of QNECs, QMACs and earnings on QNECs, QMACs and elective deferrals. The maximum hardship distribution he may receive may not exceed $15,000.
Note: Recently, Congress passed legislation providing additional relief for Katrina victims. We will provide a summary of the legislation in a future technical update.
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