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Retirement Planning > Retirement Investing

Katrina Guidance

By Savita Iyer-Ahrestani, Savita Iyer-Ahrestani

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The department of Treasury and the Internal Revenue Service (IRS) recently issued Notice 2005-92, a measure that provides guidance relating to the application of two provisions of the Katrina Emergency Tax Relief Act of 2005 (KETRA) for Hurricane Katrina victims and employer-sponsored retirement plans and IRAs.

The notice states, among other things, that employers do not have to offer individuals a direct rollover with respect to the Katrina distribution, and the plan administrator does not have to provide a 402(f) notice. In addition, the plan administrator does not have to withhold 20% of the distribution as generally required by Section 3405(c)(1). However, the distribution is subject to the voluntary withholding requirements of Section 3405(b).

The notice also allows a plan sponsor or plan administrator to rely on the reasonable representations of the individual requesting the distribution that he or she meets the KETRA residence and economic loss requirements.

Under one provision of KETRA, individuals who live in one of the four states affected by Hurricane Katrina and who suffered an economic loss as a result of the disaster are eligible for favorable tax treatment with respect to distributions from eligible retirement plans that are qualified “Katrina distributions.” These distributions are not subject to the 10% additional tax applicable to early distributions from a retirement plan (25% in the case of a Simple IRA), are 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.

Another provision of KETRA increases the allowable plan loan amount from an employer-sponsored retirement plan and provides for a suspension of payments for plan loans outstanding on or after August 25, 2005, that are made to Katrina victims.

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