On Friday, November 16, the Internal Revenue Service (IRS)
issued guidance that provides relief to taxpayers affected by
Hurricane Sandy. Specifically, IRS Announcement 2012-44 (http://www.irs.gov/pub/irs-drop/a-12-44.pdf)
relaxes procedural and administrative rules for plan loans and
hardship requests for taxpayers who have been adversely affected by
Hurricane Sandy. In order to qualify for this relief, withdrawals
must be made from a "qualified employer plan" on or after
October 26, 2012, but no later than February 1, 2013.
1. Who is eligible for relief?
Only participants and certain family members who live or work in
localities identified by FEMA for Individual Assistance due to
Hurricane Sandy are eligible for relief under Announcement 2012-44.
Participants who live outside designated localities may take a loan
or hardship distribution to assist their family members who live
within localities identified by FEMA for Individual Assistance. For
the most up-to-date list of designated localities, please see the
"Help for Victims of Hurricane Sandy" page on the IRS
website at http://www.irs.gov/uac/Newsroom/Help-for-Victims-of-Hurricane-Sandy.
2. What is a qualified employer plan?
Announcement 2012-44 provides that qualified employer plans are
401(k) plans, 403(b) tax-sheltered annuities and 457(b) deferred
compensation plans for state and local government tax-exempt
organizations.
Defined benefit and money purchase plans, which generally cannot
make in-service distributions, may not make hardship distributions
under Announcement 2012-44 other than from a separate account, if
any, within the plan containing either eligible employee
contributions or rollover amounts.
3. Is a plan amendment required prior to making such loans
or hardship distributions?
Although a qualified employer plan need not be formally amended
prior to providing loans or hardship distributions to taxpayers
affected by Hurricane Sandy, the plan must adopt a formal amendment
allowing for such features no later than the end of the first plan
year beginning after December 31, 2012 (e.g., for calendar-year
plans, a formal amendment must be adopted by December 31,
2013).
4. How much may a participant withdraw?
The amount available under a plan loan made under Announcement
2012-44 must satisfy the plan loan requirements of Section 72(p) of
the Internal Revenue Code. Although IRA participants cannot take a
loan, they may be eligible to take a distribution without being
subject to the 10 percent additional tax under Section 72(t) of the
Internal Revenue Code.
The amount available for a hardship withdrawal is limited to the
maximum amount permitted under the Internal Revenue Code and its
corresponding regulations. In addition, the relief under
Announcement 2012-44 applies to any hardship, not just the ones
listed in the Internal Revenue Code, and no post-distribution
contribution restrictions are required. For example, the six-month
prohibition on 401(k) and 403(b) contributions for employees who
take a hardship distribution will not apply.
5. How does Announcement 2012-44 relax procedural
requirements for plan loans and hardship
withdrawals?
Announcement 2012-44 provides that a qualified employer plan will
not be treated as failing to follow the procedural requirements for
plan loans or distributions imposed by the terms of the plan if it
disregards those requirements for any period from October 26, 2012,
to February 1, 2013, provided the plan administrator (or financial
institution, in the case of IRAs) makes a good-faith, diligent
effort to comply with those requirements. However, as soon as
practicable, the plan administrator must make a reasonable attempt
to assemble any forgone documentation.
If you have any questions about Announcement 2012-44 or any other
employee benefits or executive compensation matter, please contact
a member of Day Pitney's Employee Benefits group.