As victims of Hurricane Harvey begin the process of rebuilding their lives and homes, many will need access to money in order to facilitate their recovery. The IRS has stepped in and 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.”
Generally speaking, retirement plan participants are prohibited or, at the very least, strongly discouraged from taking any money out of their retirement accounts prior to reaching age 59 1/2. However, the IRS released a statement last week declaring that participants in employer-sponsored plans (401(k), 403(b), etc.) and individual retirement accounts (IRAs) will be able to access and make use of the funds in their retirement accounts either as a loan or as a hardship distribution. Furthermore, even though IRA participants are barred from receiving a loan from their plans, they too may be eligible for a hardship distribution. Essentially, the IRS will allow (for a limited time) a “victim of Hurricane Harvey to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan.”
Even if a plan does not permit a hardship distribution, the IRS will allow plan participants to access the funds in their retirement accounts (either as a hardship withdrawal or as a loan) before the terms of the retirement plan are amended to allow for hardship withdrawals or loans. Additionally, it is not a requirement that the need for which the employee is taking a distribution meet the definition of a “hardship” under the employer’s plan. Any hardship caused by Hurricane Harvey will be treated by the IRS as an “unforeseeable emergency.”
It should be noted that these special, relaxed rules and procedures do not apply on a nationwide basis. The IRS is clear this only applies to those persons residing in one of the counties in Texas that was identified by the Federal Emergency Management Agency (“FEMA”). The counties include, among others, Aransas, Bee, Brazoria, Calhoun, Chambers, Colorado, Fayette, Fort Bend, Galveston, Goliad, Hardin, Harris, Jackson, Jasper, Jefferson, Kleberg, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller, and Wharton Counties. For a complete and up-to-date list of the counties affected by Hurricane Harvey please visit FEMA online. Please note that a person living outside of the FEMA-designated disaster areas can still receive a retirement plan loan or a hardship distribution in order to assist a family member that is currently living in a disaster area.
There are a few final things to keep in mind. While the red-tape to access the funds has been reduced, the IRS has made it clear that there will be no change in the tax consequences for receiving the distribution. This means that distributions received as a hardship distribution will be included on your income tax return and may be subject to a 10% early-withdrawal penalty. Additionally, loans from retirement plans will still need to be repaid (with interest) over a period of 5 years or less. However, so long as the five-year repayment period is met, there are generally no tax consequences for a person receiving a loan from their retirement plan. Finally, this relief is not permanent, as the IRS is requiring that to qualify for relief, any distributions must be made between August 23, 2017 and January 31, 2018.