The Internal Revenue Service has formally announced indirect relief for certain victims of Superstorm Sandy. The IRS action is likely to permit them to access their retirement-oriented funds to alleviate hardships caused by the storm. The cash will still have strings attached and may ultimately reduce amounts available in retirement.
Affected employees and past employees may include certain 401(k) plan participants, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans.
To the extent that such plans may permit loans and hardship distributions, the IRS has advised the plan “will not be treated as failing to satisfy any requirement under the Code or regulations merely because the plan makes a loan, or a hardship distribution for a need arising from Hurricane Sandy,” to certain participants. Employees or former employees whose principal residence on October 26, 2012, was located in certain covered disaster areas may be participants who qualify.
The IRS explains, in addition, that “the relief provided by this announcement applies to any hardship of the employee, not just the types enumerated in the regulations, and no post-distribution contribution restrictions are required. “ Thus, for example, a six-month ban on 401(k) and 403(b) contributions by employees who take hardship distributions may not apply.
Although plan administrators may now accommodate Sandy victims, hardship distributions will continue to have some potential negatives. For example, they will presumably still be generally taxable as income and subject to a 10-percent early-withdrawal tax for participants who are not 59 ½ or older. As a result, participants may net less than anticipated.
401(k) loans will continue to have typical loan-related drawbacks as well. For example, loans must be repaid with interest and the retirement fund may not grow as expected because money is temporarily absent from the account. A participant may also be forced to repay the entire loan balance upon leaving employment.
For further information and details, plan investors and administrators should of course review the IRS announcement (2012-44), the plan, and the other Sandy-related information available on the IRS website.
If you have any questions about the IRS announcement or other issues related to 401(k) loans and disbursements, please contact me, Charles Yuen, or the Scarinci Hollenbeck attorney with whom you work.