The Internal Revenue Service is allowing 401(k) and similar employer-sponsored retirement plans to make loans and hardship distributions to victims of Hurricane Sandy and members of their families, as part of the federal government’s efforts to support state and local partners affected by the storm.

401(k) plan participants, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules, the IRS states. While IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area. To qualify for this relief, hardship withdrawals must be made by Feb. 1.

The IRS also is relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief allows a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. Further, a person who lives outside the disaster area can take out a loan or hardship distribution and use it to assist a dependent who lived or worked in the disaster area.

Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable. Also, a 10% early-withdrawal penalty usually applies.

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