(b)lines Ask the Experts – Disasters and Hardship Withdrawal Requests

“Obviously, we wish to be as accommodating as possible to the needs of our employees during this difficult time, yet still comply with the law. Can the Experts share some thoughts as to the rules that apply to such distributions?”  

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:  

First, of all, the Experts want to express their condolences to all that have suffered as the result of Hurricane Sandy. It should be noted, that, unlike in the case of Hurricane Katrina, the Internal Revenue Service (IRS) has yet to issue any special rules as of this writing that would relax the hardship distribution rules for distributions requested as a result of Hurricane Sandy. However, it is possible that the IRS will provide such relief in the future, as they have already provided relief in other areas over which they have jurisdiction. Readers can check http://www.irs.gov/News-&-Events for any updates in this regard.    

Having said this, it is certainly possible for a hardship distribution to be obtained to address a need brought about by damage or loss of a residence due to the hurricane. However, it is important to read your plan document to determine if such a provision is included in your plan. Presuming your plan permits hardship distributions, many plans follow IRS safe harbor guidance with respect to such distributions. Such safe harbor guidance includes expenses for repair of damage to a principal residence that would qualify for the casualty deduction under Code Section 165 (generally, all Sandy-related damage would qualify). However, not all plans utilize the safe harbor language, so you will need to confirm that your specific plan language permits such a hardship distribution.    

It is important to note that hardship distributions can only be made to repair property damage to the extent that such losses are not covered by insurance. Thus, insured losses would not qualify for hardship distribution. Also, the residence damaged must be the individuals’ primary residence (vacation or second homes do not count). Finally, the hardship distribution will be taxed as ordinary income, with a 10% penalty added on assuming that the individual receiving the distribution is younger than 59½ years of age.    

All affected employees should also be made aware that federal assistance may be available to them so that they can avoid tapping into retirement plan assets to pay for uninsured damages to their residence. For more information and to apply for assistance, employees should contact the Federal Emergency Management Agency (FEMA) at 800-621-3362 or www.fema.gov.    

We hope that this information will enable you to provide proper assistance to your employees during this difficult time.