Proposed Hardship Withdrawal Regulations Include Relief For Disaster Victims: Retirement Plans Can Now Make Loans, Hardship Distributions To Victims Of Hurricanes Michael And Florence

The IRS recently announced that 401(k) plans and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Michael and Hurricane Florence and to members of their families.

This relief was included in the preamble to proposed regulations, published Nov. 14 in the Federal Register, implementing several recent law changes that affect hardship withdrawals.

As a result, participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may now 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 disaster areas affected by Hurricane Michael or Florence and designated for individual assistance by FEMA. Currently, parts of Florida, Georgia, North Carolina and South Carolina are eligible. For a complete list of eligible localities, visit https://www.fema.gov/disasters. To qualify for this relief, hardship withdrawals must be made by March 15, 2019.

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 victim of Hurricane Michael or Florence 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 reasons 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 preamble.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. 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 and subject to a 10-percent early-withdrawal tax.

More information about other tax relief related to Hurricane Michael and Hurricane Florence can be found on the IRS disaster relief page.

The proposed regulations address a number of other issues related to hardship withdrawals. For details and to find out how to submit comments, see the proposed regulations.

No Author Biography has been linked to this Article.

Related Articles

February 10, 2019
By Leo G. Spanos, Senior Staff Attorney to Martha G. Bronitsky, Chapter 13 Trustee, Northern District of California (Oakland Division) Courts around the country are split on whether property acquired post-chapter 13 confirmation remains property of the estate or vests in the debtor for all purposes absent contrary language in the plan or confirmation order under 11 U.S.C. § 1327(b).1...
Members
January 21, 2019
By Jan M. Sensenich, Chapter 13 Standing Trustee for the District of Vermont As we reach the end of the first month of the partial government shutdown, with no end in sight, 800,000 federal workers have started missing their paychecks. As the shutdown continues, Chapter 13 trustees are weighing how best to address the inevitable question from federal government employee...
Members
September 19, 2021
By Helen M. Morris, Chapter 13 Standing Trustee for the Northern and Southern Districts of West Virginia Like most trustees, my case load is down, and I’ve been actively encouraging new filings. Perhaps too enthusiastically as certain new cases reflect. A bankruptcy filer who has been dormant for months filed a new case recently. Schedule A is clearly marked with...
Members
image004
April 2, 2023
Consumer law attorney, mentor and educator, Oliver Max Gardner III recently announced that he is retiring. His passion, diligent research and unmatched expertise has served as a north star in consumer law for so many of us. From building a community of like-minded enthusiasts through the renowned Bankruptcy Boot Camp and cultivating an army of consumer litigators to fiercely defending...
June 21, 2020
By The Honorable William Houston Brown (Retired) Objection to proof of claim barred by preclusion. The Chapter 13 debtor objected to Wells Fargo’s proof of claim in an adversary proceeding that alleged the note had been procured by fraud and was unenforceable; but the debtor had previously litigated those and other issues in the state court. Preclusive effect of the...
Members
February 3, 2019
By John P. Gustafson, United States Bankruptcy Judge, Northern District of Ohio, Western Division (Toledo, OH) Click here for Part 1 Click here for Part 2 Click here for Part 3
Members
November 17, 2019
By Lawrence R. Ahern, III, Brown & Ahern (Nashville, TN) Introduction This series focuses on four bankruptcy-related bills that were enacted during the 116th Congress and signed into law on August 23, 2019.1 One bill, the Small Business Reorganization Act of 2019 (SBRA),2 appears in its entirety in Appendix B to this series and was summarized in
Members
January 10, 2021
By Henry E. Hildebrand, III, Chapter 13 Trustee (Nashville, TN) Other than a recluse without any information of current events, we have been made fully aware of the fact that Congress was fashioning a second stimulus/COVID relief bill. The result is the Consolidated Appropriations Act, 2021; a massive bill with more than 5,300 pages governing a huge expanse of appropriations,...
Members
moran_cathy
July 31, 2022
It started as a means test question: could emergency medical expenses be deemed non consumer debt. It ended up as a step back to get the bigger picture. Well seasoned bankruptcy counsel brought the fact pattern to a list serve of colleagues. The prospective debtors’ income in a small consulting corporation is declining, his health crisis raises not only income...
Members
January 6, 2019
By Academy Staff In July of 2016 ConsiderChapter13.org posted an article, “Another Arrow in the Quiver of the ‘Less Than Honest Debtor’.” That article addressed a decision of the Bankruptcy Court for the Eastern District of Tennessee in In re Hurt, 2015 WL 9592064 (Bankr. E.D. Tn. 2015), in which the Court overruled the Trustee’s objection to exemptions. In Hurt,...
Members

Looking to Become a Member?

ConsiderChapter13.org offers a forum to advance continuing education of consumer bankruptcy via access to insightful articles, informative webinars, and the latest industry news. Join now to benefit from expert resources and stay informed.

Webinars

These informative sessions are led by industry experts and cover a range of consumer bankruptcy topics.

Member Articles

Written by industry experts, these articles provide in-depth analysis and practical guidance on consumer bankruptcy topics.

Industry News

The Academy is the go-to source for the latest news and analysis in the Chapter 13 bankruptcy industry.

To get started, please let us know which of these best fits your current position: