Gulf Opportunity Zone Act Rev. 12/29/05, E-mail Alert 2005-26

The retirement plan relief provided in the Katrina Emergency Relief Tax Act has been extended to the victims of Hurricanes Wilma and Rita.

Gulf Opportunity Zone Act of 2005 (GOZA). The Gulf Opportunity Zone Act of 2005 (GOZA), enacted on December 21, 2005, extends the Katrina Emergency Tax Relief Act (KETRA) for distributions and loans from eligible retirement plans to the victims of Hurricanes Rita and Wilma. Essentially, the same relief that came with KETRA has been extended to the victims of Hurricanes Rita and Wilma with appropriate adjustments for the applicable designated counties and effective dates relevant to the applicable storm. Therefore, it appears realistic to anticipate that the IRS will issue guidance that the provisions of IRS Notice 2005-92, which provided guidance on the tax treatment of KETRA distributions, will also apply to Rita and Wilma (with the appropriate dates for each hurricane). The special rules for retirement plans for Hurricane Rita and Wilma are found in Section 201 of GOZA. This section adds Section 1400Q to KETRA. Highlights of these provisions follow:

Tax-Favored Withdrawals From Retirement Plans — 10% Penalty Waived. In general, the 10% additional tax on distributions before age 59½ will not apply to any qualified hurricane distribution (nor will the 25% additional tax on SIMPLE IRAs).

Aggregate Dollar Limitation $100,000. The aggregate amount of distributions received by an individual that may be treated as qualified hurricane distributions for any taxable year shall not exceed the excess (if any) of $100,000, over the aggregate amounts treated as qualified hurricane distributions received by such individual for all prior taxable years.

Plan Treatment of Plan Distributions as Hurricane Distributions. A plan may treat distributions to an individual as a qualified hurricane distribution, without violating GOZA provided the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual does not exceed $100,000.

Amount Distributed May Be Recontributed to an Eligible Plan
3-Year Limit. Any qualified hurricane distribution may be recontributed during the 3-year period starting on the day after the distribution was received. It may be repaid in one or more contributions up to the amount of the hurricane distribution (interest earned, if any, may not be recontributed).

Treatment of Recontribution for Plans Other Than IRAs
Recontributions of funds from a plan other than an IRA to a plan (other than an IRA) will be treated as an eligible rollover distribution transferred to the eligible retirement plan in a direct trustee-to-trustee transfer as if done within 60 days of the distribution.

Treatment of Recontribution for IRAs
Recontributions of funds from an IRA being recontributed to an IRA are to be treated as a direct trustee-to-trustee transfer as if done within 60 days of the distribution.

QUALIFIED HURRICANE DISTRIBUTION DEFINITION
Any distribution, within the $100,000 limitation, from an eligible retirement plan made to an eligible individual whose principal place of abode was located in the Hurricane disaster area on the applicable date below and who has sustained an economic loss from the applicable Hurricane as follows:

• For Hurricane Katrina. Distributions may be made on or after August 25, 2005, and by or before January 1, 2007, to an individual whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina,
  
• For Hurricane Rita. Distributions, which are not Hurricane Katrina distributions, may be made on or after September 23, 2005, and before January 1, 2007, to an individual whose principal place of abode on September 23, 2005, is located in the Hurricane Rita disaster area and who has sustained an economic loss by reason of Hurricane Rita, and
  
• For Hurricane Wilma. Distributions, which are not Katrina or Rita distributions, may be made on or after October 23, 2005, and before January 1, 2007, to an individual whose principal place of abode on October 23, 2005, is located in the Hurricane Wilma disaster area and who has sustained an economic loss by reason of Hurricane Wilma.

QUALIFIED INDIVIDUAL DEFINITION

• Qualified Hurricane Katrina Individual means an individual whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina. The qualified beginning date is August 25, 2005. The applicable period is the period beginning on September 24, 2005, and ending on December 31, 2006,
  
• Qualified Hurricane Rita Individual means an individual (other than a qualified Hurricane Katrina individual) whose principal place of abode on September 23, 2005, is located in the Hurricane Rita disaster area and who has sustained an economic loss by reason of Hurricane Rita. The qualified beginning date is September 23, 2005. The applicable period is the period beginning on December 21, 2005 and ending on December 31, 2006.
  
• Qualified Hurricane Wilma Individual means an individual (other than a qualified Hurricane Katrina individual or a qualified Hurricane Rita individual) whose principal place of abode on October 23, 2005, is located in the Hurricane Wilma disaster area and who has sustained an economic loss by reason of Hurricane Wilma. The qualified beginning date is October 23, 2005. The applicable period is the period beginning on December 21, 2005 and ending on December 31, 2006.

ELIGIBLE RETIREMENT PLAN DEFINITION. The term "eligible retirement plan" shall have the meaning given such term by Code Section 402(c)(8)(B), which includes traditional IRAs, SEPs, SIMPLE IRAs, all qualified plans (other than money purchase and defined benefit plans), 457(b) governmental plan and 403(b) plans.

SPECIAL TAX TREATMENT OF DISTRIBUTIONS
Income inclusion may be spread over 3-years. Any distribution required to be included in gross income for the taxable year received shall be included ratably over the 3-taxable year period beginning with such taxable year. However, the taxpayer may elect otherwise and pay all the tax for the year of the distribution as of the tax year in which it was received.

The Eligible Rollover Notice and 20% Mandatory Withholding Are Waived on Hurricane Distributions.

RECONTRIBUTION OF WITHDRAWALS FOR HOME PURCHASES
Any individual who had received a hardship distribution, which was made during the applicable dates below, and which was to be used to purchase or construct a primary residence but which was not purchased or constructed; may recontribute the amount in one or more contributions to an eligible retirement plan. The 3-year repayment rules above will apply.

Dates For Recontributions of Withdrawals for Home Purchases:

• Qualified Katrina Distribution is a hardship distribution, from a 401(k) or 403(b) plan, or a first time homebuyer distribution from an IRA, received after February 28, 2005, and before August 29, 2005, which was to be used to purchase or construct a principal residence in the Hurricane Katrina disaster area, but which was not so purchased or constructed on account of Hurricane Katrina.
  
• Qualified Rita Distribution is a hardship (other than a qualified Katrina distribution), from a 401(k) or 403(b) plan, or a first time homebuyer distribution from an IRA, received after February 28, 2005, and before September 24, 2005, which was to be used to purchase or construct a principal residence in the Hurricane Rita disaster area, but which was not so purchased or constructed on account of Hurricane Rita.
  
• Qualified Wilma Distribution is a hardship distribution (other than a qualified Katrina distribution or a qualified Rita distribution) from a 401(k) or 403(b) plan, or a first time homebuyer distribution from an IRA, received after February 28, 2005, and before October 24, 2005, and which was to be used to purchase or construct a principal residence in the Hurricane Wilma disaster area, but which was not so purchased or constructed on account of Hurricane Wilma.

LOANS FROM QUALIFIED PLANS
Increase in Limit on Loans. Loans from a qualified plan under 401(a), a 403(a) or (b) plan or a government plan to a qualified individual made during the applicable period (i.e. after enactment of KETRA and GOZA respectively and before 2007) shall be limited to $100,000, instead of $50,000. The qualified individual may borrow from the entire vested account balance of the employee under the plan. Thus, the 50% of the vested account balance rule has been increased to 100%.

Delay of Loan Repayments
1-year delay. In the case of a qualified individual with an outstanding loan on or after the qualified beginning date(i.e. the day of the repective hurricane), if the due date for any repayment with respect to such loan occurs during the period beginning on the qualified beginning date and ending on December 31, 2006, such due date shall be delayed for 1 year.

Subsequent repayments after 1-year shall be appropriately adjusted to reflect the delay in the due date and any interest accruing during such delay. In determining the 5-year period and the term of a loan, the 1-year delay shall be disregarded.

PLAN AMENDMENTS
Qualified plan amendments or annuity amendments to incorporate changes from GOZA are due on or before the last day of the first plan year beginning on or after January 1, 2007, or such later date as the Secretary may prescribe. For governmental plans the deadline is two years later.
During the period beginning on the applicable effective date above and ending on the date the amendment is adopted, the plan or contract is to be operated as if such plan or contract amendment were in effect; and thus, such plan or contract amendment applies retroactively for such period.


Bill Grossman, QPA