Victims of the flooding in Louisiana will be allowed to take loans and receive hardship distributions from 401(k) and similar retirement plans, under new guidance from the Internal Revenue Service and the U.S.Department of Labor.
Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans, may be eligible to access the money in those plans under streamlined loan procedures and liberalized hardship distribution rules.
In addition, although IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.
Also, the Labor Department said that plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. Plans can also ignore the reasons that normally apply to hardship distributions, so that they can be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement in accordance with provided guidance.
Plans making disaster-related loans or hardship distributions not authorized by their plan documents must be amended by the end of the first plan year beginning after December 31, 2016.
The Labor Department also said it will not treat any person as having violated Title I of Employee Retirement Income Security Act solely because of complying with the IRS relief provisions, and it has also provided guidance regarding delinquent contributions and blackout notices.
Employees and certain members of their families who live or work in the disaster area must qualify for this relief by making hardship withdrawals by Jan. 17, 2017.
The IRS said that it is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. That should allow eligible retirement plan participants to access their money more quickly. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.
Under the new guidance, not only can a Louisiana flood victim take a hardship distribution or borrow up to the specified statutory limits from their retirement plan, a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.
The Labor Department said that hardship distributions will be taxable, and generally subject to the 10 percent early distribution penalty.
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