Estate Planning Needs
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A ccessing Qualified Retirement Fund Balances to Address Financial Needs Resulting for COVID-19

The Further Consolidated Appropriations Act (the “Act”) permits qualified disaster distributions from a qualified retirement plan account, which can be made free of the 10% premature distribution penalty (if the participant in under age 59½), but only if there is a federally declared disaster under section 401 of the Stafford Act. The President’s Friday declaration was made under section 501 and was not made within the required time frame. Accordingly, there is not yet in place any legislation that will allow such distributions to be made free of the penalty.
 
However, the hardship withdrawal regulations may allow certain plan participants to take early withdrawals.”  Under ERISA, a distribution from a 401(k) account due to hardship may be permitted in cases where there is an “immediate and heavy financial need”. There are seven “deemed hardship criteria” that are considered to automatically satisfy the “immediate and heavy financial need” test, which include: (1) expenses for medical care, (2) costs of purchasing a principal residence, (3) payment of tuition and room and board for post-secondary education, (4)payments to avoid an eviction from or foreclosure on a principal residence,(5) burial or funeral expenses, (6)expenses incurred to repair damages to a principal residence, and (7)expenses and losses caused by federally declared disaster under certain circumstances. It is conceivable that many 401(k) plan participants would qualify for some of the deemed hardship criteria due to COVID-19, such as the need to prevent eviction or incurring expenses for medical care. Such early withdrawals are subject to the 10% early withdrawal penalty if you are under 59½ years old. You should contact your plan administrator for further details about plan provisions that may be applicable.
 
Applicable regulations, under a new safe harbor definition, would classify distributions for expenses and losses (including loss of income) on account of a disaster declared by FEMA under the Stafford Act as being due to an immediate and heavy financial need. There has yet to be a qualifying FEMA declaration, however.
 
Until an appropriate declaration is made, participants should consider taking a plan loan, if permitted by the plan. Plan sponsors should consider adding a plan loan feature, if none currently exists, and to amend provisions allowing for hardship distributions to be made on account of losses resulting form COVID-19. Note that a hardship distribution to a participant under age 59 ½ is subject to a 10% premature distribution penalty.
 
You should consult with your plan administrator, and plan administrators should consult with the plan’s advisers before attempting to utilize these options.
IRC Section 139 Relief is Available to Employers

As a result of the March 13, 2020 designation of the Coronavirus pandemic as a disaster under the Stafford Act, any amount paid by an employer to or for the benefit of an employee to “reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster ” will not be included in the gross income of the recipient employee and will remain fully deductible by the paying employer. Internal Revenue Core §139. No regulations have been issued that provide guidance on exactly which expenses and under what circumstances reimbursement or payments may occur. Employers should consult their tax advisors at Mandelbaum Salsburg for further details.
Martin D. Hauptman
973.731.9825
Steven A. Holt
973.243.7941
www.lawfirm.ms