Hurricane Katrina Relief: IRS Guidance and New Legislation
September 23, 2005
In response to the devastating impact of Hurricane Katrina on the residents of Louisiana, Mississippi and Alabama, both the IRS and President Bush have approved relief packages.
IRS Announcement 2005-70
On September 15, 2005, the Internal Revenue Service (“IRS”) released Announcement 2005-70 which provides guidance and relief to taxpayers who have been adversely affected by Hurricane Katrina and have assets in qualified retirement plans. Announcement 2005-70 provides guidance relating to hardship and emergency withdrawals and loans from retirement plans. The IRS Announcement and related relief detailed below is effective as of September 15, 2005.
According to this Announcement, a 457(b) Plan or a 401(k) Plan will still satisfy requirements under the Internal Revenue Code (the “Code”) or regulations when the plan makes a hardship distribution or emergency withdrawal for a need arising from Hurricane Katrina, to an employee or former employee who has lived or worked as of August 29, 2005, in one of the counties or parishes in Louisiana, Mississippi or Alabama that have been or are later designated federally declared disaster areas. In addition, the relief allows for Katrina-related hardships and emergency withdrawals for participants who have a lineal ascendant (e.g., parents, grandparents, great-grandparents) or descendant (e.g., children, grandchildren, great-grandchildren), spouse, or dependent who has lived or worked in one of these counties or parishes affected by Hurricane Katrina.
This relief applies and would allow such hardships or emergency withdrawals whether or not the plan currently provides for hardship distributions or emergency withdrawals. Plans that do not currently provide for hardship or emergency withdrawal distributions may be amended to do so by the end of the 2006 plan year.
Plan sponsors and administrators may rely upon the representations from employees or former employees as to the need for and amount of hardship or emergency withdrawal distribution, unless the plan sponsor or administrator has actual knowledge to the contrary.
The amount available for a hardship or emergency withdrawal distribution is still limited to the maximum amount that would be permitted to be available for a hardship or emergency withdrawal distribution under the plan and under the Code and regulations. However, the relief applies to any hardship or emergency arising from Hurricane Katrina, not just the types and examples currently enumerated in the hardship and emergency withdrawal regulations. Also, 401(k) plans are not required to follow the 6-month contribution suspension restriction after allowing for such hardship withdrawals.
Similarly, plans may make loans to affected participants whether or not they otherwise provide for loans if the requirements of Code section 72(p) are met. Plans that do not currently provide for loans may be amended to do so by the end of the 2006 plan year.
In addition, the Announcement allows plan sponsors and administrators to follow good faith compliance procedures in administering their loan and hardship procedures in these respects through March 2006. At the same time, the Department of Labor ("DOL") has issued a statement announcing a reasonable good faith approach to DOL enforcement in areas such as the timing in transmitting elective deferrals or loan payments and giving blackout notices. This guidance applies to employers, plan sponsors and service providers located in the affected disaster areas.
More information about this relief can be found in Announcement 2005-70 which can be accessed along with other Katrina- and general disaster relief-related materials from the IRS’ website at www.irs.gov.
New Legislation
On September 23, President Bush signed into law the Katrina Emergency Tax Relief Act of 2005 (KETRA), which provides for a waiver of the 10 percent penalty tax imposed on participants who receive a distribution of up to $100,000 from an individual retirement account (“IRA”) or tax favored retirement plan (i.e. Code sections 401(a), 403(a), or 403(b) plans) before attaining age 59 ½ and whose principal residence is located in a federally declared disaster area. The taxes on these distributions could also be prorated over a three-year period. In addition, amounts distributed could be recontributed to the plan over the next three-year period. This new legislation is effective as of September 23, 2005.
The bill effectively doubles the limitation on plans loans by allowing participants affected by Hurricane Katrina to receive loans up to the lesser of $100,000, or 100% of the vested accrued benefit for loans made after enactment and up to one year later. In addition, outstanding loan payments due after August 29, 2005 and before August 30, 2006 may be deferred an additional 12 months.
This new legislation also affects distributions from your Vantagepoint IRA.
ICMA-RC will continue to monitor any legislation or guidance that provides relief to victims of Hurricane Katrina and will continue to provide you with information through this Web site and publications.