The damage from Hurricane Sandy has been estimated at over $60 billion, second only to the total caused by Hurricane Katrina in 2005 along the Gulf Coast. Thousands of homes and businesses along the East Coast have been destroyed and countless more have suffered significant damage. Some damage is covered by insurance and hundreds of millions of federal assistance dollars are available; but many homeowners still face staggering repair bills and storm-related expenses, including the cost of food and alternative lodging.
For some, the only source of funds to cover these expenses is the individual retirement account, either through loans or withdrawals. Normally loans and hardship withdrawals have significant restrictions and limitations imposed by the plans. Certain conditions must be met and paperwork assembled before a loan or distribution may be permitted. Some plans have regulations that specify what constitutes a “hardship” withdrawal. The IRS has allowed plans to relax those restrictions to now allow for Sandy-related expenses. In some cases, even those plans that do not normally permit any hardship withdrawals are allowed to do so under a recent IRS announcement. The IRS has relaxed some procedural and administrative rules to make retirement funds more readily available to Sandy victims. This relief is aimed at individuals’ primary residence (vacation homes are not included). In addition, relatives outside the affected area can tap their retirement funds to assist the homeowner in a designated disaster area.
Under the terms of the announcement, the IRS will not consider employers to be failing to satisfy a requirement of the plan for loans or distributions made between October 26, 2012, and February 1, 2013, as long as the employer makes a “good faith” effort to meet those requirements. Employers may rely on representations from the employee as to the need for and the amount of the hardship and gather the paperwork after the loan or distribution has been made.
The decision to use retirement funds is a serious one. Withdrawals are generally taxable and are subject to a 10% early withdrawal penalty for account owners younger than 59 1/2. The withdrawal reduces the employee’s retirement nest egg, and normally the employee is not permitted to make contributions to the plan for six months. This six month ban, however, has been suspended for victims of Sandy.
A loan against the account balance may be a better approach. The employee’s retirement balance is still reduced; but, as long as the loan is repaid within five years, the proceeds are tax-free.
“My heart goes out to the thousands who have experienced immeasurable losses,” said Peter Macaluso, FMi Vice President. “While tapping into retirement savings should be a last resort, Hurricane Sandy has forced employees to do so. The IRS has done the right thing in making these funds readily available to those so desperately in need.”
Your FMi Sales Representative can help employees and employers administer loan and hardship distribution requests.
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