In an October 17, 2005 news release, the Internal Revenue Service summarized and clarified the beneficial changes in the tax law relating to tax-qualified retirement plans for victims of Hurricane Katrina brought about in the Katrina Emergency Tax Relief Act of 2005. These changes apply generally to plan participants whose principal residence was in the Hurricane Katrina disaster area on August 28, 2005, and who sustained an economic loss from Hurricane Katrina. Under the new rules, such eligible individuals may qualify for the following tax-favored early distributions, re-contributions, and loans from qualified plans:
Early distributions. Distributions made on or after August 25, 2005, and before January 1, 2007, from an eligible retirement plan to an eligible individual will not be subject to the 10-percent additional tax on early distributions to participants under the age of 59-1/2 or the mandatory 20-percent withholding tax. The total amount of such tax-favored distributions an individual can receive from all plans, annuities, or IRAs is $100,000. These distributions generally will be included in taxable income and can, at the participant’s election, be included ratably over a three-year period. However, if an individual who receives a qualified Hurricane Katrina distribution re-contributes the distribution to an eligible retirement plan within 3 years, the distribution is treated as an eligible rollover distribution.
Loans. A loan from a qualified plan to an eligible individual will not be treated as a taxable distribution if it is made on or after August 25, 2005, and before January 1, 2007, and does not exceed the lesser of the following amounts: (1) $100,000, less the highest outstanding balance of all qualified plan loans to the individual during the prior year, or (2) the eligible individual’s vested benefit under the plan.
Re-contributions. Certain distributions from a qualified plan may be re-contributed without any tax consequences during the period beginning on August 25, 2005 and ending on February 28, 2006. Specifically, if an eligible individual took a distribution such as a hardship distribution from a 401(k) plan or 403(b) annuity, or a qualified first-time homebuyer distribution from an IRA, to purchase or construct a home in the Hurricane Katrina disaster area after February 28, 2005 and before August 29, 2005, but the home was not purchased or constructed as a result of Hurricane Katrina, the eligible individual may re-contribute the funds to the plan.
The IRS also indicated that it will issue guidance on the tax-favored treatment of distributions to Hurricane Katrina victims. The IRS is preparing Form 8915, Qualified Hurricane Katrina Retirement Plan Distributions and Repayments, which will be used to report distributions and determine the amount to be included in income.