November 28, 2012
IRS Helps Public Sector Retirement Plans Respond to Hurricane Sandy
The Internal Revenue Service (IRS) has issued guidance that will help public sector plans respond quickly to participant requests for hardship distributions and plan loans due to needs arising from Hurricane Sandy. In addition, the guidance will help the plans, plan sponsors and service providers that have been affected by the hurricane with respect to various compliance-related requirements under the Internal Revenue Code (IRC). This Compliance Alert describes the key provisions of the IRS guidance, Announcement 2012-44.
IRS Announcement 2012-44
Generally, Announcement 2012-44 liberalizes the hardship distribution rules, including rules for unforeseeable emergency distributions from a governmental §457(b) plan, and streamlines loan procedures so that plans can provide participants with faster access to funds to help Hurricane Sandy victims. These special rules will apply to hardship distributions and loans that are made during the time period and to the participants described below.
For a hardship distribution or loan to be eligible for the special Hurricane Sandy distribution and loan rules, the distribution or loan must be made on or after October 26, 2012 and no later than February 1, 2013 to plan participants who meet one or more of the following criteria:
- The participant’s principal residence on October 26, 2012 was located in one of the counties (or Tribal Nations) identified as covered disaster areas.1
- The participant’s place of employment on October 26, 2012 was located in one of the identified counties (or Tribal Nations).
- The participant’s lineal ascendant or descendant (generally son, daughter, parent or grandparent), dependent or spouse had a principal residence or place of employment on October 26, 2012 in one of the identified counties (or Tribal Nations).
Under this guidance, eligible plans, generally §401(k) plans, §403(b) plans and governmental §457(b) plans,2 are permitted to:
- Make hardship distributions and loans before the plan has been amended for that purpose, provided that the plan is ultimately amended by the last day of the first plan year beginning after December 31, 2012 (or by December 31, 2013 for calendar-year plans).
- Make hardship distributions and loans to participants outside of the covered disaster areas so that they can assist affected relatives (sons, daughters, parents, grandparents), dependents or spouses who lived or worked in an identified area.
- Make hardship distributions and loans without regard to certain procedural requirements (including certain documentation requirements) imposed by the plan, provided the plan makes a good-faith effort to comply with the requirements and provided the plan makes a reasonable attempt to assemble any missing documentation as soon as practicable.
- Make hardship distributions for any need arising from Hurricane Sandy. Distributions do not have to be limited to the types of hardships listed in the plan, even if the plan otherwise limits hardship distributions to the regulatory “safe harbor” reasons. For example, distributions may be made for purposes of buying food and paying rent. In addition, plans do not have to impose post-distribution restrictions on contributions (i.e., the six-month ban on §401(k) or §403(b) contributions following hardship distributions when a plan uses the regulatory safe harbors for determining financial need and hardship reasons).
- Rely on the representations of the participant with regard to the need for and amount of any hardship distribution with respect to any eligible individual, absent actual knowledge to the contrary.
It is important to note that Announcement 2012-44 does not change the maximum amount available for a hardship distribution under the plan under the IRC or related regulations or the statutory limits for loans, nor does it change the tax consequences of a hardship distribution or loan.
The IRS also has provided additional guidance that is relevant to plans, plan sponsors and plan service providers affected by Hurricane Sandy. IRS News Release 2012-833 postpones certain tax filings and payment deadlines until February 1, 2013, and also provides relief with respect to related interest, late payment and late filing penalties for affected entities. In addition, Announcement 2012-444 specifies that all of the deadlines for the employee benefit related acts listed in IRS Revenue Procedure 2007-56, Section 85 are currently postponed until February 1, 2013 for affected plans.
Plan sponsors might wish to check the IRS web page devoted to Hurricane Sandy relief on a regular basis because the IRS has indicated that it will expand existing relief provisions and add additional relief as necessary.6 Also, the IRS has invited those affected by Hurricane Sandy but not covered by any of the existing guidance to contact it directly to discuss individual relief on a case-by-case basis.
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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice. The Segal Company can be retained to work with plan sponsors and their attorneys on plan amendments and any required participation communications.
- Covered disaster areas are identified as federally declared disaster areas in the News Releases issued by the IRS for Victims of Hurricane Sandy, which are on the following page of the IRS website:
http://www.irs.gov/uac/Newsroom/Help-for-Victims-of-Hurricane-Sandy. (Return to the Compliance Alert.)
- Defined benefit or money purchase plans may not make hardship distributions pursuant to Announcement 2012-44 except from separate accounts, if any, containing rollovers or employee contributions. (Return to the Compliance Alert.)
- The news release is available on the IRS website. (Return to the Compliance Alert.)
- See the link in the first paragraph of this Compliance Alert. (Return to the Compliance Alert.)
- See IRS Revenue Procedure 2007-56. (Return to the Compliance Alert.)
- See the link in footnote 1. (Return to the Compliance Alert.)
Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only and should not be construed as legal advice. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.