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Hurricane Sandy Relief from the IRS

The Internal Revenue Service announced that 401(k)s and similar
employer-sponsored retirement plans can make loans and hardship
distributions to victims of Hurricane Sandy and members of their
families.

401(k) plan participants, employees of public schools and tax-exempt
organizations with 403(b) tax-sheltered annuities, and 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 the disaster area. To
qualify for this relief, hardship withdrawals must be made by Feb. 1,
2013.

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
Sandy victim 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 limits 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 Announcement.

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. Also, a 10 percent
early-withdrawal tax usually applies.