IRS Announcement 2005-70: Retirement Plans Can Make Loans, Hardship Distributions to Hurricane Katrina Victims

 

The IRS released Announcement (Ann.) 2005-70 on September 15, 2005, to provide broad-based retirement plan distribution relief to individuals who lived or worked in the presidentially declared Hurricane Katrina disaster areas, as well as to their family members. Ann. 2005-70 was released in addition to various tax filing and retirement plan contribution-related relief previously released by the IRS and Department of Labor.

 

Tax-qualified retirement plan laws impose various limitations on distributions and loans.  IRS Ann. 2005-70 provides relief from certain operational and documentation requirements for plans that allow participants to use retirement assets to alleviate financial hardship caused by Hurricane Katrina.  Specifically, the following relief applies to plans meeting the requirements of IRC Secs. 401(a), 403(a), and 403(b), and governmental IRC Sec. 457(b) plans.

  • A plan can use the special rules in Ann. 2005-70 for loans or hardship distributions made between August 29, 2005, and March 31, 2006. 
  • Plan documents do not have to contain hardship or loan provisions to permit these transactions, but plans must be of a type that are eligible to offer hardship distributions. Money purchase pension plans and defined benefit plans may not make hardship distributions other than from rollover accounts or accounts containing only employee contributions.
  • If a plan currently does not allow hardship distributions or loans and permits them under this guidance, the plan administrator will have until the end of the first plan year beginning after December 31, 2005, to amend the plan document to reflect the change. For calendar year plans, this means a December 31, 2006, amendment deadline. 
  • Hardship distribution amounts are limited to the maximum amount that would be permitted under current law and must still come from the statutorily approved sources.  This means that hardship distributions are not permitted from qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), or earnings on elective deferrals. 
  • Hardship reasons are not limited to the types specified in Treasury regulations (e.g., preventing eviction, medical expenses, etc.).  For governmental 457(b) plans, any hardship arising from Hurricane Katrina is treated as an “unforeseeable emergency.”
  • The six-month freeze on making salary deferrals for participants that take hardship distributions does not apply for those taking distributions under the relief provided for Hurricane Katrina victims.
  • Loans must still satisfy IRC Sec. 72(p) requirements, including meeting the maximum loan amount limit of $50,000 or fifty percent of a participant’s vested plan account balance. Because these loan rules are created by statute, only new legislation can modify these rules.  (See the article “Legislation: Retirement Plan Distribution Relief for Hurricane Katrina Victims” in the Industry News section of this web site for information on pending legislation to increase the maximum loan amount for Hurricane Katrina victims.)
  • A plan can make a loan or hardship distribution to a participant whose home or place of employment on August 29, 2005, was located in one of the counties or parishes in Louisiana, Mississippi or Alabama that have been or are later designated as disaster areas eligible for Individual Assistance by the Federal Emergency Management Agency (FEMA) because of the devastation caused by Hurricane Katrina.  Additionally, a plan can make a loan or hardship distribution to anyone who has a lineal descendant, ascendent, dependent or spouse whose home or employer was in the disaster area. 
  • Plan administrators can rely on representations made by participants as to the financial need and the amount required, unless the plan administrator has actual knowledge to the contrary.  The normal hardship documentation requirements, (e.g., medical bills to prove financial need) are not required.  There is no relief, however, from the requirement that the plan administrator authorize these distributions before they are paid; therefore, a plan administrator must be located to authorize a plan distribution. 
  • Normal documentation requirements do not apply as long as the plan administrator makes a good faith effort to obtain proper documentation and does obtain it (or makes a “reasonable attempt” to obtain it) “as soon as practical.”  For example, if spousal consent is normally required, but a plan participant believes his or her spouse is dead, the plan administrator is permitted to process the distribution and obtain documentation later. 

Although Ann. 2005-70 does not refer to IRAs specifically, IRS News Release IR-2005-105, which accompanied the release of Ann. 2005-70, indicates that even though IRA holders cannot take loans from IRAs, IRA distribution procedures may be streamlined to help Hurricane Katrina victims access their retirement money.

 

The IRS has released other tax filing and IRA-specific relief for Hurricane Katrina victims in News Releases IR-2005-84, IR-2005-91 and IR-2005-96, which can be viewed at http://www.irs.gov/newsroom/article/0,,id=147085,00.html.

Look to BISYS for Assistance

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Subscribing to BISYS’ 800 Consulting service will provide direct access to ERISA and industry experts to ensure your staff have the answers they need to assist your customers with Hurricane Katrina-related relief.  BISYS provides immediate, accurate answers that save valuable staff time lost to research or correcting errors.  BISYS’ 800 Consulting service is your best source for questions about

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  • health savings accounts.

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