Update: Hardship Distributions for Damaged Residences 

Mar 20, 2018

The recently enacted tax legislation, commonly referred to as the Tax Cuts and Jobs Act, made a change to the types of personal casualty losses that qualify for a casualty deduction under Section 165 of the Internal Revenue Code (“Code”). Starting in 2018, only those casualty losses attributable to a federally declared disaster will be deductible under Code Section 165. This change will be in effect from 2018 through 2025 and immediately affects many 401(a), 401(k), and 403(b) plans that allow for hardship distributions.

Federal regulations provide that a hardship distribution may only be made on account of a participant’s immediate and heavy financial need. This “immediate and heavy financial need” requirement may be satisfied through either a “facts and circumstances” analysis or by meeting IRS “safe harbor” criteria. The safe harbor criteria include specific events that are deemed to be on account of an “immediate and heavy financial need”, including expenses for the repair of damage to the participant’s principal residence that would qualify for the casualty deduction under Code Section 165. In addition, plans that apply a “facts and circumstances” test may have language that specifically references Code Section 165.

Beginning immediately, all plans that use the IRS safe harbor criteria or that use facts and circumstances rules that specifically reference Code Section 165, can make hardship distributions for expenses for the repair of damage to the Participant's principal residence only if that damage is attributable to a federally declared disaster. Example: A participant whose principal residence is in Baltimore County Maryland has a house fire during the first week of 2018. The fire does extensive damage to the home and the participant applies for a hardship distribution to pay for repairs needed due to the fire. The plan uses IRS safe harbor criteria for determining whether an immediate and heavy financial need exists. The distribution cannot be made because the damage was not attributable to a federally declared disaster.

Next steps: Newport Group is updating our hardship procedures and forms to reflect this change in safe harbor hardship rules. For plan sponsors and TPAs who make hardship determinations for their plans, and who use the safe harbor criteria or reference Code Section 165, we suggest before granting a hardship distribution for the repair of damages to a participant’s residence that you confirm that the damage is due to a federally declared disaster. This can be accomplished by referring to the federally declared disasters as listed on the FEMA website, confirming that the participant’s residence is in a county listed on the website, and ensuring that substantiating documentation concurs with the Incident Period as reported on the FEMA site.

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Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. Fiduciary consulting services are provided through Newport Group Securities, Inc., an SEC-registered investment adviser and FINRA-registered broker-dealer, and InterServ, LLC, an SEC-registered investment adviser. Newport Group Securities, Inc. and InterServ, LLC are affiliates of Newport Group, Inc. All securities transactions are provided through Newport Group Securities, Inc., in its role as broker-dealer. All fiduciary consulting services are provided through the registered investment adviser. when offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer.
Trust and custody services provided by Newport Trust Company, a New Hampshire state chartered trust company and wholly owned subsidiary of Newport Group, Inc.