CARL WATTS & ASSOCIATES

October 02, 2017

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Retirement Plans and
Hurrican Relief Support
Retirement plans are necessary and quite popular, but they are also a very complicated tax topic if you take into consideration all the rules, regulations and restrictions they impose.


For instance, retirement plans may offer loans to participants, but a plan sponsor is not required to include loan provisions in its plan.

Profit-sharing, money purchase, 401(k), 403(b) and 457(b) plans may offer loans. To determine if a plan offers loans, you should check with the plan sponsor or the Summary Plan Description.

IRAs and IRA-based plans (SEP, SIMPLE IRA and SARSEP plans) cannot offer participant loans. A loan from an IRA or IRA-based plan would result in a prohibited transaction.

To receive a plan loan, a participant must apply for the loan and the loan must meet certain requirements. The participant should receive information from the plan administrator describing the availability of and terms for obtaining a loan.

In order to make a loan or distribution (including a hardship distribution), a plan must contain language authorizing the loan or distribution. Also, except to the extent a distribution consists of already taxed amounts, the distribution will be includible in gross income and generally subject to the 10 percent additional tax under IRS regulations.

Similar rules relating to income inclusion and taxation apply to a distribution from an IRA.


Recently the IRS announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Harvey and members of their families. This is similar to relief provided last year to Louisiana flood victims and victims of Hurricane Matthew.

Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.
Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster area localities affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, parts of Texas qualify for individual assistance. For a complete list of eligible counties, visit https:// www.fema.gov/disasters.

To qualify for this relief, hardship withdrawals must be made by Jan. 31, 2018.

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 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a victim of Hurricane Harvey 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 reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter.

If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in the IRS Announcement 2017-11.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. 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 and subject to a 10-percent early-withdrawal tax.

It goes almost without saying, that a tax professional can be but a small expense necessary to make sure that the steps you are taking to provide for your family are complying with the tax rules and regulations and offer you the most of the tax advantages you are entitled to.

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