Feds Release KETRA Plan Distribution Guidance

November 30, 2005 (PLANSPONSOR.com) - Federal tax officials have offered guidance on how to implement two provisions of the legislation passed in September to give Hurricane Katrina victims certain tax breaks.

The U.S. Treasury Department and the Internal Revenue Service (IRS) included the guidance in a Web statement about two areas of the Katrina Emergency Tax Relief Act of 2005 (KETRA) having to do with Katrina victims and workplace retirement programs and IRAs.

The first area dealt with processing and tax treatment of “Katrina distributions” – retirement plan payouts for eligible taxpayers. A Katrina distribution is not subject to the 10% additional tax applicable to early distributions from a retirement plan, 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. 

“In general, a distribution from an employer retirement plan made on account of hardship is not an eligible rollover distribution,” the guidance said. “However, if such a distribution satisfies the requirements under section 1.C of this notice, then the distribution is not treated as made on account of hardship for purposes of this notice and, any portion of the distribution is permitted to be recontributed toan eligible retirement plan.”

Also the document released Wednesday said that the definition of Katrina distribution under section 101(d)(1) of KETRA does not limit the designation of a Katrina distribution to amounts withdrawnsolely to meet a need arising from Hurricane Katrina. So, even though aqualified individual is required to have sustained an economic loss, Katrina distributions are permitted without regard to the qualified individual’s need and the amount of the distribution is not required to correspond to the amount of the economic loss suffered by the qualified individual.

The document also includes guidance in administering the KETRA provision increasing the allowable plan loan amount from an employer-sponsored retirement plan from $50,000 to $100,000 and providing for a suspension of payments for plan loans outstanding on or after August 25, 2005 that are made to Katrina victims.

The new guidance document is here .