The U.S. Department of Labor's Employee Benefits Security Administration (EBSA) and the Internal Revenue Service (IRS) have published guidance for employers relating to changes in the law that increase the amount of loan distributions permitted through 401(k) and similar employer-sponsored plans to participants affected by Hurricane Katrina.
Under the Katrina Emergency Tax Relief Act of 2005 (KETRA), participants adversely affected by the hurricane receive special tax treatment for certain qualified retirement plan distributions, called “Katrina distributions.”
The IRS explains that a Katrina distribution is not subject to the 10 percent additional tax applicable to early distributions from a retirement plan (25 percent in the case of a Simple IRA), is generally includible in income over a three-year period, and – to the extent the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan (recontributed) within a three-year period – will not be includible in income at all.
The act also increases the limits on the amounts of plan loans that may be made to participants affected by the hurricane. The new law covers eligible distributions made between Aug. 25, 2005 and Jan. 1, 2007.
The agencies are issuing guidance for employers and individuals relating to the application of the distribution and loan provisions of KETRA.
As stated in IRS Notice 2005-92, the Department of Labor will not treat any person as having violated the provisions of Title I of the Employee Retirement Income Security Act, including the requirements that plan loans be available on a reasonably equivalent basis and be adequately secured, solely because they made a plan loan to a qualified individual in compliance with the provisions of KETRA.
IRS Notice 2005-92 explains the circumstances under which distributions and loans can be made from a plan to participants and beneficiaries affected by the hurricane. Read the full text by clicking this link: IRS Notice 2005-92.