With so much damage caused by Hurricane Sandy, many people will be exploring every possibility, including their 401(k) plan account balance, to pay for repairs. Hardship distributions are an optional provision in 401(k) plans, meaning that 401(k) plans can permit hardship distributions but they are not required to permit hardship distributions. So the first step is checking the plan document to see if the plan permits hardship distributions.
If the 401(k) permits hardship distributions, Treas. Reg. 1.401(k)-1(d)(3)(iii)(B)(6) says one of the reasons a 401(k) plan can make a hardship distribution is:
“(6) Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income).”
In a Retirement Plans FAQs Regarding Hardship Distributions posted on the IRS’ website, the IRS says:
“8. Are there special hardship distributions available for hurricanes and natural disasters?
Generally, there are no special rules for hardship distributions on account of hurricanes or other natural disasters. You should follow the regular hardship distribution rules and show that you have an immediate and heavy financial need and, in some cases, have exhausted other resources. Your plan will 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 automatically qualify.
Occasionally, when a hurricane or other natural disaster is especially devastating, legislation is passed that provides for special plan distributions and loans that would otherwise not be available to employees. For example, in 2005 a law was passed to help individuals and businesses affected by Hurricane Katrina.
See Tax Relief in Disaster Situations and Publication 547, Casualties, Disasters, and Thefts, for disaster area relief.”