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.