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How Your 401(k) Plan Can Help Victims of Hurricane Katrina
By Jeff Belfiglio and Kim Kaald
[November 2005]
Update [Jan. 2006]
In December 2005, the Gulf Opportunity Zone Act of 2005 (the "GO Zone Act") was enacted to expand the "KETRA" withdrawal relief and participant loan relief described below. The relief now includes victims of Hurricane Rita (whose primary place of abode was in the disaster area on September 23, 2005) and Hurricane Wilma (whose primary place of abode was in the disaster area on October 23, 2005), in addition to victims of Hurricane Katrina. However, the hardship withdrawal relief described below continues to apply only to victims of Hurricane Katrina. For further information about effects of the GO Zone Act on your 401(k) plan, please contact us. |
The recovery and rebuilding efforts for victims of Hurricane Katrina will likely take many years and significant financial resources. You and your company may have already contributed toward these relief efforts and may wish that you could do more. In fact – you can. Your 401(k) plan (or other profit sharing plan) may be able to assist, even if your company was not directly affected by Hurricane Katrina.
The Internal Revenue Service (IRS), the Department of Labor (DOL), and Congress have worked together to approve changes to the rules governing 401(k) plans that will provide relief to plan participants and members of their families affected by Hurricane Katrina. You may elect to amend your 401(k) plan between now and the end of the 2006 plan year to provide the following relief:
1. Hardship Withdrawal Relief
IRS Announcement 2005-70 provides hardship withdrawal relief to participants (whether current employees or former employees), who on Aug. 29, 2005, meet one or more of the following criteria:
- The participant’s principal residence was in one of the counties or parishes in Louisiana, Mississippi, or Alabama designated as disaster areas eligible for individual assistance by FEMA as a result of Hurricane Katrina,
- The participant’s place of employment was located in one of those counties or parishes, or
- The participant’s eligible family member had a principal residence or place of employment in one of those counties or parishes. This means that even if a participant was not personally affected by Hurricane Katrina, he or she may withdraw amounts needed to help a parent, grandparent, child, grandchild, dependent, or spouse who was affected by Hurricane Katrina.
The hardship withdrawal relief applies to hardship withdrawals taken between August 29, 2005 and March 31, 2006. A hardship withdrawal under this relief does not need to be for one of the standard hardship withdrawal reasons stated in the plan document, although the amount that can be withdrawn is still limited to the amount necessary to satisfy the hardship situation. For example, the hardship withdrawal could be used to pay for temporary housing expenses, which would not normally be permitted under the hardship withdrawal rules.
Hardship withdrawals are not exempt from the 10 percent early-withdrawal penalty tax, but the amount of the hardship withdrawal may be grossed up to cover the 10 percent early-withdrawal penalty tax, if the participant elects to do so.
If the plan normally prohibits a participant from making additional 401(k) contributions for a six-month period following the hardship withdrawal, this six‑month suspension period is waived under this special relief. The Plan Administrator may rely on representations from the participant as to the need or amount of a hardship distribution, unless the Plan Administrator has actual knowledge to the contrary.
2. Special “KETRA” Withdrawals
The Katrina Emergency Tax Relief Act of 2005 (KETRA) permits an eligible participant whose principal place of residence on Aug. 28, 2005 was in the Hurricane Katrina disaster area - and who sustained an economic loss due to the hurricane - to withdraw up to $100,000 from his or her plan accounts without paying the usual 10 percent early withdrawal penalty tax. These withdrawals are permitted until Dec. 31, 2006.
The participant can elect either to:
- repay the distribution within three years, in which case no income taxes are payable, or
- not repay the distribution within the three-year period and instead have the distribution treated as taxable income, with the federal income taxes either (a) spread over three years, or (b) paid in one year (which might be beneficial to a participant if he or she has other offsetting deductions in that year, such as casualty losses).
3. Participant Loan Relief
Your 401(k) plan may also be amended to permit a participant whose principal place of residence on Aug. 28, 2005, was in the Hurricane Katrina disaster area and who sustained an economic loss due to the hurricane to take a plan loan in an increased amount (i.e., up to $100,000 instead of the normal $50,000 maximum) and to provide a longer period of time to repay loan payments due beginning Aug. 25, 2005 and ending Dec. 31, 2006.
You may implement these hardship withdrawals, KETRA withdrawals, and loan provisions now, as long as you amend your 401(k) plan to provide for this relief before the end of the 2006 plan year. You may elect to adopt these provisions even if your 401(k) plan doesn’t currently permit hardship withdrawals or loans. However, a money purchase pension plan or defined benefit plan that does not permit hardship withdrawals may not be amended to provide for hardship withdrawals under this relief.
Please let us know if you would like further information or if you would like us to prepare an amendment to your 401(k) plan to permit these special relief provisions.
For more information, please contact:
This
Advisory is a publication of the Employer Services Department of Davis Wright Tremaine LLP.
Our purpose in publishing this Advisory is to inform our clients
and friends of recent developments in employment
law. It is not intended, nor should it be used, as a substitute
for specific legal advice as legal counsel may be given only
in response to inquiries regarding particular situations.
Copyright
© 2005, Davis Wright Tremaine LLP.
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