Harvey Victims Can Access Retirement Money More Easily: IRS

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By Colleen Murphy

Victims of Harvey can take hardship distributions or borrow funds from their retirement plans under a streamlined process, the IRS announced in a move that has become commonplace following large disasters.

The relief is one example of how the Internal Revenue Service can offer aid to taxpayers following a natural disaster. The agency also relaxed distribution rules following Hurricanes Katrina, Sandy, and Matthew. The changes give some breathing room: Hurricane victims or their family members can withdraw money for urgent needs and plan administrators can document the process after the fact.

Hardship distributions from participating retirement plans can typically only be made if an individual shows an “immediate and heavy financial need,” and funds are capped at the amount of need, according to the IRS. But now plans can make the distributions or loans “before the plan is formally amended to provide for such features,” allowing individuals to access their money “with a minimum of red tape,” the IRS said in an Aug. 30 news release (IR-2017-138).

In Announcement 2017-11 the agency said retirement plans, such as 401(k)s, can ignore typical requirements for hardship distributions, allowing victims to use funds for needs such as food and shelter. IRS also waived a six-month ban on 401(k) and 403(b) contributions that typically applies after a hardship distribution. Individuals can take a distribution or borrow up to the limits of their plan, the IRS said.

“it shows they’re being responsive, and this is a common-sense, welcome type of thing to do: providing relief for hurricane victims and their families,” Don Wellington, a partner in the Washington and Los Angeles offices of Steptoe & Johnson LLP, told Bloomberg BNA Aug. 30.

Easing Requirements

The announcement also helps plan administrators, who have likely been bombarded with requests following the storm, practitioners said.

“Plan administrators will have to catch up, they’ll have to make reasonable efforts to get the right documentation afterwards, but at least now they can fast-track it just to help people get money quickly,” said Damian A. Myers, an associate in Proskauer Rose LLP’s employee benefits and executive compensation group.

The bank or plan administrator will need to assemble documentation “as soon as practicable,” the IRS said. For example, a plan could make a loan to an individual with a deceased spouse without the death certificate, even if it is required, the agency said. “If it is reasonable to believe, under the circumstances, that the spouse is deceased,” the loan is made no later than Jan. 31, 2018, and the administrator attempts to obtain the certificate as soon as possible, the plan won’t be disqualified, the IRS said.

Qualified plans can make loans that are the greater of $10,000 or 50 percent of the vested account balance, or $50,000, whichever is less, according to the IRS. For victims of Hurricanes Katrina, Rita, and Wilma, the IRS raised that limit: The maximum was increased to the lesser of $100,000 or 100 percent of the individual’s account balance.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

Texts of IR-2017-138 and Announcement 2017-11 are in TaxCore.

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