Q&A: Loans on 401(k) Plans Due to Natural Disasters

Are you Ready? Question: One of our Florida employees has been significantly impacted by Hurricane Irma and has asked about a 401(k) loan to help cover expenses. Can we do this for employees?

Answer: Probably. .... 

After Hurricanes Harvey and Irma, the IRS announced streamlined loan procedures and relaxed hardship distribution rules for employer-sponsored 401(k) plans. The streamlined loan procedures apply for employees (and certain family members) impacted by the storm if they lived or worked in an area designated by the Federal Emergency Management Agency (FEMA) for individual assistance as of the date(s) listed in the designation.

Your plan administrator can search the map on FEMA’s website using the employee’s home address and/or your office’s address to determine if the employee is eligible for assistance. The employee must verify that the address was their primary residence or workplace on September 4, 2017. Eligible employees can borrow from their qualified retirement plans up to the statutory limits. Generally, this limit is 50% of the employee's vested account balance or $50,000, whichever is less. However, if the vested account balance is less than $10,000 then the employee can only borrow up to $10,000.

Learn more: Human Resources Disaster Preparedness: Is Your Workplace Ready?

Because administrative and procedural rules are relaxed, impacted employees can access their money more quickly, use the money for expenses not usually permitted when using hardship distributions (such as food and shelter), may not have to meet pre-distribution documentation requirements, and will not be subject to the six-month ban on making contributions that ordinarily applies when an employee takes a hardship distribution.

These relaxed procedures apply for impacted employees from September 4, 2017 through January 31, 2018.

If you are interested in offering these options for impacted employees, the retirement plan must be formally amended if it does not already provide these loans, distributions, processes or options. The amendment must be made no later than the end of the first plan year after December 31, 2017. For calendar year plans, that is December 31, 2018. Therefore, the plan is not required to be amended before the retirement plan begins allowing the loans.

You also may have employees who live or work outside the designated disaster areas but who want to take a loan from their 401(k) to assist a child, parent, grandparent, or other dependent who lives or works in the disaster area. Employees may receive a loan or hardship distribution for this purpose as well.

Finally, it is important for your employee to understand that any loan proceeds are tax free if they are repaid over a period of five years or less. If an employee takes a hardship distribution, unless the distribution consists of already-taxed money, it is included in the employee’s gross income and subject to the 10% early withdrawal penalty.

We encourage you to work with your plan administrator and counsel to review the announcement, your plan document, and applicable laws and regulations to determine the best course of action.

Jeanette Coleman

Written by Jeanette Coleman