In what is increasingly a pattern following weather-related natural disasters, the Internal Revenue Service announced that 401(k) plans can make loans and hardship distributions to victims of Hurricane Matthew. This is similar to relief provided this summer to Louisiana flood victims, and includes members of victims’ families.
Eligible workers include:
- Participants in 401(k) plans,
- employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities,
- state and local government employees with 457(b) deferred-compensation plans.
Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.
Retirement plans can provide this relief to employees and certain members of their families who live in parts of North Carolina, South Carolina, Georgia and Florida. For a complete list of eligible counties, visit https://www.fema.gov/disasters. To qualify for this relief, hardship withdrawals must be made by March 15, 2017.
Eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.
This means that a retirement plan can allow a victim of Hurricane Matthew to take a hardship distribution or borrow up to the “specified statutory limits from the victim’s retirement plan.”
It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.
Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in the announcement.
Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable. Also, a 10 percent early-withdrawal tax usually applies.
Further details are in Announcement 2016-39, posted today on IRS.gov. Additionally, more information about other relief related to Hurricane Matthew can be found on the IRS disaster relief page.