Hardship Distributions and Plan Loans

Internal Revenue Service Announcement 2017-11 eases the requirements for loans and hardship distributions from qualified employer retirement plans for participants who have been impacted by Hurricane Harvey. A distribution to a current or former employee from a tax-qualified retirement plan can be treated as a result of hardship or an unforeseeable emergency.
The IRS announcement also removed certain limitations on making post-distribution contributions and provides that a retirement plan may temporarily suspend its procedural requirements for plan loans and distributions. Employers who make loans or hardship distributions must amend their plan language no later than the end of the first plan year beginning after December 31, 2017 if their plan does not already contain provisions to provide for such features.

CAUTION: A potential tax trap for the employee is that a hardship distribution taken from a qualified employer retirement plan before age 59 1/2 is not only taxable income to the employee but is also subjected to the 10% early distribution penalty. There are a number of exceptions that a taxpayer can rely on to avoid the penalty (see here). Unfortunately, suffering damage from a severe hurricane is not one of those exceptions.

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