Hurricane Season: How You Can Prepare

As if 2020 hasn’t been enough fun… now it’s the official hurricane season (the National Oceanic and Atmospheric Administration says it starts June 1). And we’ve already had four tropical storms in the Atlantic: Arthur, Bertha, Cristobal and Dolly—which 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.

 

 

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

 

 

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.

 

 

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.

 

 

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.

 

 

Treas. Reg. §1.401(k)-1(d)(3)(i) says that an early distribution from a 401(k) must be made to meet an immediate and heavy financial need of an employee, and that the amount must be necessary to satisfy that need. That includes the needs of an employee’s spouse and dependents, as well as an employee’s beneficiary, even if that beneficiary is not his/her spouse or dependent.

 

What constitutes an “immediate and heavy” financial need depends on the facts and circumstances surrounding a specific distribution. The IRS considers the following to be immediate and heavy expenses that could justify a hardship distribution from a 401(k), which is spelled out in Treas. Reg. §1.401(k)-1(d)(3)(iii):

 

A financial need may be immediate and heavy even if it was reasonably foreseeable—so presumably, if a hurricane were predicted days in advance, the costs incurred as a result of it may still qualify.

 

Treas. Reg. §1.401(k)-1(d)(3)(iv)(E) says that a distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if two conditions are met:

 

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.

IRAs

 

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.

 

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