IRS provides retirement plan distribution relief for Hurricane Matthew
TAX ALERT |
In Announcement 2016-39, the IRS provided nearly identical relief for retirement plan distributions to taxpayers affected by Hurricane Matthew as that recently provided for the Louisiana flooding. As expected, the guidance provides that employers can streamline some of the red tape that would typically apply to hardship distributions and plan loans.
Loans or hardship distributions to employees or former employees who live or work, or whose family live or work, in a FEMA designated area can be made so long as the plan administrator does not have knowledge that contradicts an individual’s representation for the need of the amount related to the hurricane. Retirement plans making loans or distributions under the relief provided in this announcement will not be subject to other restrictions provided under the guidance that would normally apply to such transactions, such as restrictions on contributions after receiving a hardship distribution.
It should be noted that the relief does not change the tax consequences of any loan or hardship distribution being made under the relief. Hardship distributions will still be taxable as an in-service distribution and potentially subject to early distribution penalties. The relief simply temporarily removes certain administrative burdens of the plan so that funds can be released quicker than normal procedures would typically take, and so that plans that do not currently have provisions for hardship distributions can make them before the employer formally amends its plan to include such provisions.
This guidance can be followed for distributions made by March 15, 2017. While the relief is intended to expedite the process so that affected individuals can access funds needed for assistance, it still requires the employers to follow up the distributions with certain actions. For example, if the plan does not currently allow for hardship distributions, the plan must be amended no later than the first plan year beginning after Dec. 31, 2016. In addition, the relief does not remove all requirements for documentation but allows the distributions to go out before the documentation is received. Therefore, employers should welcome the relief for the opportunity to help affected employees but should pay careful attention to the procedures provided in the relief to avoid disqualifying their plans.