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IRS Loosens Plan Distribution Rules in Harvey-Affected Areas

September 11, 2017

The IRS has issued an announcement permitting some employer-sponsored plans to make loans and distributions to taxpayers affected by Hurricane Harvey without the usual paperwork, at least for now.

'Hardship' Rules
The tax law has strict rules to limit distributions to employees from retirement savings plans before retirement. Plans can make early "hardship" distributions, and they can sometimes loan funds to plan participants, but only to the extent allowed under the plan's governing documents. Even when allowed, these distributions and loans require paperwork. For example, a hardship distribution might need to document that a "hardship" is up to the government's standards. 

Harvey Waiver
Paperwork that is merely annoying in normal times can be a real problem when your furniture is floating. IRS Announcement 2017-11 takes that, and similar situations, into account by waiving some important rules in areas affected by Harvey. But, there's a catch: the paperwork may need to be made up after things dry out. 

Some key provisions in Announcement 2017-11:

  • Plan administrators may rely on the representations of employees or former employees that they are facing a hardship without requiring documentation in making a hardship distribution, unless the administrator actually knows that there is no hardship.
  • The relief applies to any hardship of the employee, even ones not covered under the government's hardship distribution regulations.
  • Starting August 23, 2017, through January 31, 2018, the plan can make hardship distributions or loans even if the plan document doesn't provide for them.
  • Starting August 23, 2017, through January 31, 2018, procedural shortcuts or omissions in making loans or hardship distributions to affected taxpayers will be forgiven. 

While the IRS is loosening these rules, there still are, well, rules:

  • If a plan currently doesn't allow hardship distributions and loans, but it goes ahead and makes them under the special rules of Announcement 2017-11, it will need to retroactively update its plan document to provide for such hardship distributions or loans by the end of the first plan year beginning after December 31, 2017.
  • Plans must make a "good-faith diligent effort" to assemble "foregone documentation" for loans or hardship distributions "as soon as practicable." For example, if a loan or distribution requires consent of a spouse, but the spouse named in employee plan documents is deceased, the plan administrator has to make "reasonable efforts" to get a death certificate for the deceased spouse to provide documented evidence that the spouse consent was not required.

Counties Impacted
The rule waivers are only available for loans or hardship distributions to employees whose employers are in counties identified for individual assistance arising out of Hurricane Harvey at the FEMA website. Any additional counties added to the list will become eligible for Announcement 2017-11 relief. As of this writing the following Texas counties are covered: Aransas, Bee, Brazoria, Calhoun, Chambers, Colorado, Fayette, Fort Bend, Galveston, Goliad, Hardin, Harris, Jackson, Jasper, Jefferson, Kleberg, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Refugio, Sabine, San Jacinto, San Patricio, Victoria, Waller and Wharton. 

IRAs qualify
Individual Retirement Accounts may make early distributions under the Harvey relief. However, IRAs are not permitted to make loans to their owners. 

Downsides
While the relief rules allow early distributions, any early distributions covered by the Harvey relief announcement are still taxable, except to the extent they represent a return of previously taxed contributions. And, if they are made before the recipient reaches age 59 ½, they are also subject to the 10 percent additional tax on "premature" distributions. These provisions can make qualified plans an expensive source of disaster relief compared to other options. 

Get Advice
The Harvey relief rules are only available in limited areas, and only for a limited time. For the rest of the country, nothing changes, and the usual rules continue to apply. 

Employer retirement plan rules are complex, and these Harvey relief provisions could trip up taxpayers who overstep their limits. Be sure to discuss any plans to make or receive hardship distributions with your tax advisor.

There are additional federal tax relief provisions related to postponement of most federal tax returns, estimated tax payments, uninsured losses, contributions of inventory, certain involuntary conversions and like-kind exchanges, diesel fuel tax penalty waivers and various State of Texas tax filings and exemptions all designed to make affected area taxpayers and the volunteers providing assistance in these disaster stricken areas a little easier. We will be reporting on these efforts in other articles.

Contact your Eide Bailly professional for additional information.