The second half of 2017 brought devastating hurricanes to several areas of the Southern U.S. and Puerto Rico. In recognition of Hurricanes Harvey, Irma, and Maria, the U.S. Congress provided for both retirement plan hardship distribution tax relief and more generous plan loan rules for participants whose primary residences were damaged in one of the storms’ paths. What are the guidelines for this relief if some of your plan’s participants were hit?
The Disaster Tax Relief and Airport and Airway Extension Act provided hardship distribution tax relief for economic losses of up to $100,000 from a 401(k) plan, 403(b) plan, or governmental 457(b) plan withdrawn by qualifying participants. The relief is available in the following ways:
- Excise Tax Relief. The 10% excise tax for distributions before age 59 1/2 does not apply for qualifying distributions.
- Spreading of Income Tax. Unless the participant elects otherwise, distributions are taken into account as taxable income ratably over a 3-year period.
- Recontribution Option. Participants can elect to recontribute their qualifying distributions to a plan or individual retirement account (IRA) within 3 years of the distribution date. In addition, participants who obtained a hardship distribution to purchase a principal residence in a Hurricane Disaster Area between February 28, 2017, and September 21, 2017, but who were not able to purchase or construct the residence on account of the applicable hurricane, can repay the distribution to the plan until February 28, 2018. Amounts repaid will be treated as if they have been rolled over in a tax-free transaction.
- Withholding. Qualifying distributions are not subject to the 20% withholding that is ordinarily applicable to eligible rollover distributions.
These forms of hurricane-related hardship distribution relief are available until December 31, 2018.
Plan Loan Provisions
The act also gives special provisions for plan loans, including:
- Amount of Loan. The maximum plan loan may equal 100% of the participant’s balance, up to $100,000, versus the normal limit of 50% of the account balance, up to $50,000.
- Deferral of Repayment. Qualified participants with loan payments due between the date of the hurricane that affected them and December 31, 2018, may have their loan payments delayed a year. Interest may still accrue during the period of delay.
As with the hardship distribution relief, the special plan loan provisions are available until December 31, 2018.
The participants eligible for the relief under the new federal act are not identical to those eligible under the Internal Revenue Service’s (IRS) hardship relief, according to an October 12 Kilpatrick Townsend law firm bulletin on the hurricane relief measures. While the IRS relief allows for easier access to retirement funds on account of losses due to the recent hurricanes, the IRS could not on its own alleviate the adverse tax impacts of obtaining a hardship distribution, the firm said.
Only participants who reside in one of the deemed Hurricane Disaster Areas qualify for relief under the act, while plan participants with children, parents, or certain other family members or dependents in a Hurricane Disaster Area qualify for the IRS hardship relief.
Difference from IRS Relief
“This is an important distinction and a potential source of confusion because the special tax relief for hardship distributions is not available for participants who do not reside in one of the Hurricane Disaster Areas, even if they obtain a hardship on account of losses due to a hurricane,” Kilpatrick Townsend said.
The IRS is expected to issue guidance addressing questions under the act.
Plan amendments must be adopted by sponsors to incorporate the relief provided by the act. It allows for an amendment deadline of the last day of the plan year beginning on or after January 1, 2019 (for example, December 31, 2019, for calendar-year plans), with an additional 2 years for governmental plans to adopt required amendments. However, the IRS has discretion to delay the amendment deadlines.
|Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.|