401(k) and similar employer-sponsored retirement plans can make loans and hardship distributions
On November 16, 2012, the Internal Revenue Service issued Announcement 2012-44 in an effort to bring relief to those people that were impacted by Hurricane Sandy. The Service announced that 401(k) and similar employer-sponsored retirement plans could make loans and hardship distributions to employee victims of Hurricane Sandy and certain members of their families. Said distributions must be made on or after October 26, 2012 and no later than February 1, 2013.
This can be a much-needed source of additional funds for those impacted by the disaster that either live or work in the designated disaster areas in New York, Connecticut, New Jersey and Rhode Island. The plans in question include 401(k) plans, 403(b) tax sheltered annuities of employees of public schools and tax-exempt organizations as well as 457(b) deferred compensation plans for state and local government employees. Participants of those plans may be eligible for loans and hardship distributions from their plans. In the case of IRAs, which do not allow for loans, participants may qualify to receive distributions under greatly simplified procedures. Plans under 457(b) generally may not make loans unless the participant is faced with an unforeseeable emergency. This rule defines Hurricane Sandy as a qualified unforeseeable emergency, thereby allowing for a hardship distribution. The purpose is to get much-needed funds to those who are in immediate need as easily and with as few red-tape procedures as possible.
Normally there is a six-month ban on 401(k) and 403(b) contributions on participants that take hardship distributions, but under Announcement 2012-44, this ban will not apply. If an employer plan does not currently have a hardship provision written into their plan, the time for them to amend their plan will be extended until no later than the end of the first plan year beginning after December 31, 2012. The usual documentation procedures that a Plan Administrator requires relating to a hardship request has been relaxed under 2012-44, allowing for the Plan Administrator to make a good-faith, diligent effort under the circumstances to comply with the paperwork requirements and every reasonable attempt to assemble any documentation not originally compiled at the time of the distribution.