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IRS Allows Retirement Plans To Aid Hurricane Victims

by Mike Godfrey, Tax-News.com, Washington

22 November 2012


As part of the United States government's efforts to support those who have been impacted by Hurricane Sandy, the Internal Revenue Service (IRS) has announced that employer-sponsored retirement plans can make loans and hardship distributions to its victims and members of their families.

Retirement plan participants, employees of public schools and tax-exempt organizations with tax-sheltered annuities, and state and local government employees with deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though individual retirement account participants are barred from taking out loans, they may be eligible to receive distributions under the liberalized procedures.

Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area. To qualify for this relief, hardship withdrawals must be made by February 1, 2013.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on retirement plan contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that 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.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the limits that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter.

Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable. Also, a 10% early-withdrawal tax usually applies.

TAGS: individuals | tax | investment | pensions | law | employees | retirement | Internal Revenue Service (IRS) | tax authority | United States | tax breaks | individual income tax

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