Hurricane Season: Steps a Plan Can Take to Prepare

The official hurricane season has just begun (the National Oceanic and Atmospheric Administration says it starts June 1). But we’ve already had a tropical system in the Atlantic (Andrea) — and that serves as a reminder that it can be helpful to a service provider and plan administrator to prepare… just in case.

The IRS offers some helpful tips and reminders, including the following.

Don’t Forget to Update Emergency Plans

Since a disaster can strike any time, be sure to review emergency plans annually. Make plans ahead of time and be sure to practice them.

Create Electronic Copies of Key Documents

Keep a duplicate set of key documents, including bank statements, tax returns, identifications and insurance policies, in a safe place such as a waterproof container and away from the original set.

Check on Fiduciary Bonds

Employers that use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

Hardship Distributions

The usual hardship distribution rules generally apply even when there is a hurricane or other natural disaster; generally, there are no special rules for such times. A plan may list the specific criteria it uses to determine if a participant is eligible for a hardship distribution. Expenses for repairing damage to an employee's principal residence may qualify automatically.

Sometimes when a hurricane or other natural disaster is especially devastating, laws are enacted that provides for special plan distributions and loans that would otherwise not be available to employees. For example, in 2005 the federal government enacted a law to help individuals and businesses affected by Hurricane Katrina, and agencies issued regulations implementing that law.

A hardship distribution may not exceed the amount of the employee’s need. However, the amount may include what is necessary to pay any taxes or penalties that may result from the distribution.

A distribution cannot be a way to address storm-related damage and at the same time preserve a savings account — Treas. Reg. §1.401(k)-1(d)(3)(iv)(B) says that the federal government does not consider a distribution of be necessary to satisfy an immediate and heavy need if the employee has other resources available to meet the need. And here the inclusion of an employee’s spouse and dependents is a double-edged sword — in setting this standard, the IRS includes not just the assets of the employee, but also those of his or her spouse and dependents.

There is no set rule regarding whether assets are considered available; that determination depends on the specific facts and circumstances of an individual case. There are, however, some assets not considered to be available; for instance, property held for an employee’s child in an irrevocable trust or under the Uniform Gifts to Minors Act.

There generally is no limit on when an IRA owner may take a distribution from his or her IRA — but there may be unfavorable tax consequences, such as an additional tax on early distributions. However, certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from a retirement plan are exempt from the additional tax on early distributions. Specifically, a distribution from an IRA for higher education expenses or to finance a first-time home purchase is exempt from the early distribution tax.

The IRS makes questions and answers on hardship distributions available here.