IRS Announces Relief from Certain Procedural Requirements Applicable to Retirement Plan Loans and Hardship Withdrawals
Qualified retirement plans are permitted to contain provisions allowing participants, under very specific terms and conditions set forth in the Internal Revenue Code and its related regulations, to (A) borrow from their defined contribution plan balances and/or (B) obtain hardship distributions of a portion of their defined contribution plan balances. In Announcement 2012-44, the Internal Revenue Service relaxed several of these requirements to benefit participants and their families who live or work in areas devastated by Hurricane Sandy.
This relief applies only to loans and hardship distributions made on or before February 1, 2013.
The relief provided by the announcement is available to plan participants and their lineal ancestors, descendants, dependents, and spouses whose place of employment or place of principal residence is located in one of the counties or Tribal Nations that were designated as covered disaster areas due to Hurricane Sandy. Thus, the participant himself or herself does not need to live or work in the affected area, as long as one of the specified types of family members does live or work there.
Relief from Loan Requirements
- Plans that do not currently contain loan provisions may make loans anyway, provided that the plan is amended on or before the end of the first plan year beginning in 2013 to include proper loan provisions.
- Plans may make loans in the absence of the documentation typically required for loans. However, as soon as practicable, the plan must make a reasonable attempt to assemble any forgone documentation.
Relief from Hardship Distribution Requirements
- Plans that do not currently contain hardship distribution provisions may make hardship distributions anyway, provided that the plan is amended on or before the end of the first plan year beginning in 2013 to include proper hardship distribution provisions.
- Hurricane Sandy is treated as an “unforeseeable emergency” for purposes of the hardship distribution rules.
- Plan administrators may rely upon representations from an employee or former employee regarding the need for and amount of a hardship distribution, unless the plan administrator has actual knowledge to the contrary. However, as soon as practicable, the plan administrator must make a reasonable attempt to assemble any forgone documentation.
Although the provisions discussed above can be attractive if cash is needed on an expedited basis, some of the general disadvantages of plan loans and hardship distributions continue to apply regardless of these provisions. For example, amounts borrowed from a qualified plan will miss out on the investment returns that would have been achieved had the funds remained in the plan. Perhaps more importantly, hardship distributions made under these provisions continue to be subject to income tax and, in most cases for participants under age 59 ½, a 10% federal penalty, plus applicable state penalties, for early withdrawal.