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December 05, 2022

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IRS Eases Rules for Plan Loans and Hardship Distributions After Hurricane Harvey

The IRS has released Announcement 2017-11 to provide relief to taxpayers from requirements for loans and hardship distributions for participants of qualified retirement plans who have been adversely affected by Hurricane Harvey.

Pursuant to the announcement, tax-qualified plans—including 401(k), 403(b), and 457(b) plans—will not be treated as failing to satisfy any requirement under the Internal Revenue Code or related regulations if the plan makes a loan or a hardship distribution to any employee or former employee who lives or works in one of the Texas counties identified for assistance by the Federal Emergency Management Agency (FEMA).

Individuals who live outside these areas also may take out a plan loan or hardship distribution to assist a son, daughter, parent, grandparent, or other dependent who lives or works in the designated counties.

Plans will be permitted to make loans or hardship distributions before being formally amended to provide for such features as required under ERISA. Plans are also permitted under the announcement to waive distribution standards under which a hardship is deemed to exist only for certain enumerated events, and may relax documentation requirements prior to making such distributions or loans.

Additionally, plans may disregard rules relating to the six-month prohibition on contributions that is normally imposed on participants following hardship distributions. Hardship withdrawals must be made by January 31, 2018, to qualify for this relief.

The IRS emphasizes that the tax treatment of loans and hardship distributions will remain unchanged. Generally, retirement-plan loan proceeds are not taxable if the loan is repaid within five years. Hardship distributions are generally taxable and subject to a 10 percent early-withdrawal tax.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VII, Number 244

About this Author

Laura Heacock, Ballard Spahr Law Firm, Finance, Labor and Employment Attorney

Laura P. Heacock focuses her practice on all areas of employee benefits and executive compensation. She advises clients on issues relating to the design, administration, and taxation of health and other welfare benefit plans and about compliance with the Affordable Care Act, HIPAA, HITECH, COBRA, cafeteria plan rules, and other legal requirements. Ms. Heacock prepares clients for audits of their privacy and security measures under HIPAA and advises them about the rules governing wellness initiatives, and has experience conducting HIPAA trainings that focus on compliance...

Brian Pinheiro, Ballard Spahr Law Firm, Labor and Employment, Healthcare Law Attorney

Brian M. Pinheiro is Chair of Ballard Spahr's Business and Finance Department and the Practice Leader of the firm's Employee Benefits and Executive Compensation Group. He is also a member of Ballard Spahr's Elected Board.

He represents for-profit, tax-exempt, church, and government employers on matters relating to executive compensation, including Section 409A and the Section 280G golden parachute rules; tax-qualified retirement plans, including cash balance pension plans; 401(k), 403(b), and 457 plans; and health and welfare benefit plans. 

Brenda Ching, Ballard Spahr Law Firm, Business, Finance, Labor and Employment Attorney
Of Counsel

Brenda M. Ching has 15 years of experience advising clients on the design and operation of employer-sponsored programs including employee welfare benefit programs, retirement plans and nonqualified deferred compensation plans, incentive compensation programs, and various types of employer stock compensation.

Ms. Ching advises clients on compliance requirements for employee retirement and welfare benefit programs under various laws including ERISA, COBRA, HIPAA, FMLA, the Patient Protection and Affordable Care Act (ACA), as well as Internal...