[author: Jeffrey S. Ashendorf]
Executive Summary: In addition to the other various employee benefit plan relief provided as a result of Hurricane Sandy, on November 16 the Internal Revenue Service announced, in Announcement 2012-44, that certain individual account plans, including Section 401(k) plans, Section 403(b) tax-sheltered annuities, and governmental Section 457(b) deferred compensation plans can provide plan loans and hardship withdrawals (including "unforeseeable emergency" distributions under 457(b) plans) to those participants who were (or who have certain family members who were) adversely affected by Hurricane Sandy. In addition, IRA owners may also qualify to receive distributions with reduced administrative procedures.
Non-governmental 457(b) plans – i.e., those maintained by tax-exempt employers – are not covered by this relief. In addition, qualified pension plans, including both defined benefit and money purchase plans, are not eligible for the relief, except for distributions that are made from a separate account within the plan that is limited to either employee contributions or rollover amounts.
Under the Announcement, plan participants who, on October 26, 2012, lived or worked (or who have certain family members who lived or worked) in areas affected by the storm and designated as disaster areas can receive loans and/or hardship withdrawals through February 1, 2013 under less-stringent procedures than normally apply. For plans that already contain loan and/or hardship provisions, the administrative and procedural rules can be waived so that loans or withdrawals can be received more quickly and easily. For example, any storm-related hardship will qualify the participant for a hardship distribution – not only those situations that may be enumerated in the plan. The Announcement also says that the IRS will not require plans to apply the six-month freeze on elective contributions that normally applies when a hardship distribution is made. In addition, plan administrators may rely upon a participant's representations as to the need for, and amount of, a hardship distribution, unless the administrator has actual knowledge that the representations are inaccurate. However, limitations on the maximum amount available for distribution will continue to apply, as will legal restrictions on the distribution (e.g., no hardship withdrawals from QNEC or QMAC, or from earnings on elective contributions). Loans must continue to satisfy the requirements of Code Section 72(p), but plan administrative requirements may be waived if warranted by reason of Hurricane Sandy.
Where requirements are waived under the Announcement, the plan administrator (or the financial institution in the case of an IRA) must make a "good-faith diligent effort under the circumstances" to comply with the requirement, and make a "reasonable attempt" to obtain any forgone documentation "as soon as practical." The Announcement gives the example of difficulty in obtaining a spouse's death certificate in order to waive a spousal consent requirement.
Plans that do not already contain loan and/or hardship provisions can also make loans or hardship distributions without formally amending the plan, provided that the plan is amended to provide for those loans or hardship distributions by the end of its plan year beginning in 2013.
The counties, and Tribal Nations, that have been declared as disaster areas are:
In Connecticut: Fairfield, Middlesex, New Haven, and New London Counties and the Mashantucket Pequot Tribal Nation and Mohegan Tribal Nation located within New London County;
In New Jersey: Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren Counties;
In New York: Bronx, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Sullivan, Suffolk, Ulster and Westchester Counties;
In Rhode Island: Newport and Washington Counties.
If you have any questions regarding the special relief, please feel free to contact the author of this Legal Alert, Jeffrey Ashendorf, firstname.lastname@example.org, any member of FordHarrison's Employee Benefits Practice Group, or the FordHarrison attorney with whom you usually work.