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The Internal Revenue Service is allowing 401(k)s and similar employer-sponsored retirement plans to make loans and hardship distributions to survivors of Hurricane Katrina and members of their families. It is the first time that the IRS and the Departments of the Treasury and Labor have ever provided broad-based relief to retirement plan participants affected by a major disaster. “It’s both the magnitude of the elements of the disaster and the length of time it will take to recover that is prompting this,” says Thomas Schendt, a partner at Alston & Bird law firm, which represents financial-services providers. Fidelity Investments says it has seen a “significant increase” in hardship-withdrawal requests because of the hurricane. The new IRS relief applies to: 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 certain 457 deferred-compensation plans. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures. To qualify, hardship withdrawals must be made by March 31, 2006. Under the IRS changes, retirement plans can allow Katrina victims to take hardship distributions before age 59 or borrow up to the specified limits from their retirement plans to repair or replace homes or for food or other uses not permitted for hardship withdrawals. Family members in other parts of the country also can take out retirement plan loans or hardship distributions to assist a son, daughter, parent, grandparent or other dependent affected by Katrina. In addition, the IRS is waiving the six-month ban on 401(k) contributions that normally occurs after hardship withdrawals and allowing retirement plans to make loans or hardship distributions before they are formally amended to allow them. Ordinarily, retirement plan loan proceeds are tax-free if repaid within five years. Under current law, hardship distributions generally are taxable. Also, a 10 percent early-withdrawal tax usually applies, but Congress is currently considering possible modifications to this tax and other assistance under a bill proposed by Senators Max Baucus, D-Montana, and Charles Grassley, R-Iowa. Related Link:
Source: Internal Revenue Service Note: This Benefit Advocates Web site page contains links to third-party Web sites. The linked sites are not under the control of The Benefit Advocates, and The Benefit Advocates is not responsible for their contents. The links are provided only as a convenience. A link's inclusion on this site does not imply any endorsement by The Benefit Advocates.
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Hurricane
Katrina Survivors Get 401(k) Assistance
