IR-2018-236, November 29, 2018
WASHINGTON — The Internal Revenue Service recently announced that 401(k) plans and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Michael and Hurricane Florence and to members of their families.
This relief was included in the preamble to proposed regulations, published Nov. 14 in the Federal Register, implementing several recent law changes that affect hardship withdrawals.
As a result, participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may now be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. 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 or work in disaster areas affected by Hurricane Michael or Florence and designated for individual assistance by FEMA. Currently, parts of Florida, Georgia, North Carolina and South Carolina are eligible. For a complete list of eligible localities, visit visit FEMA's Disasters page. To qualify for this relief, hardship withdrawals must be made by March 15, 2019.
The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, 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 broad-based relief means that a retirement plan can allow a victim of Hurricane Michael or Florence 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 preamble.
The IRS emphasized that the tax treatment of loans and distributions remains unchanged. 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 and subject to a 10-percent early-withdrawal tax.
More information about other tax relief related to Hurricane Michael and Hurricane Florence can be found on the IRS disaster relief page.
The proposed regulations address a number of other issues related to hardship withdrawals. For details and to find out how to submit comments, see the proposed regulations.