Katrina Emergency Tax Relief Act of 2005
Rev. 09/29/05, E-mail Alert 2005-19

On September 23, 2005, the Katrina Emergency Tax Relief Act of 2005 (KETRA) was enacted. The first four sections provide special rules for use of retirement funds for relief to Hurricane Katrina.

• Section 101 Tax favored withdrawals for relief relating to Hurricane Katrina
  
• Section 102 Recontribution of withdrawals for home purchases cancelled due to Hurricane Katrina
  
• Section 103 Loans from qualified plans for relief relating to Hurricane Katrina
  
• Section 104 Provisions relating to plan amendments
  

Section 101
Tax favored withdrawals for relief relating to Hurricane Katrina

a. 10% early withdrawal tax waived. Maximum amount $100,000
The 10% early withdrawal penalty [section 72(t)] will not apply to any “qualified Hurricane Katrina distribution” (QHKD) that does not exceed $100,000.
b. QHKDs do not violate IRC. Control group rules apply
An Eligible Retirement Plan (defined in e. below) will not violate any requirements of the Internal Revenue Code as long as the QHKD does not exceed $100,000. The $100,000 is an aggregate total amount withdrawn from all of the employer’s plans. Note that whether the overall limit is exceeded will also be based on the controlled group rules.
c. QHKD may be repaid to plan within 3 years of day after receipt

1. A QHKD may be repaid during a 3-year period beginning the day after the date the QHKD is received by the participant. The contributions may be repaid in one or more deposits to an Eligible Retirement Plan that may accept a rollover contribution under 402(c); 403(a)(4); 403(b)(8); 408(d)(3) or 457(e)(16).
2. A QHKD is treated as eligible rollover distribution moved by trustee-to-trustee transfer within 60 days.
3. An IRA QHKD may also be repaid within 3 years and treated as a direct trustee-to-trustee transfer made within 60 days.

d. Definitions for this section

1. Qualified Hurricane Katrina Distribution (QHKD)
Is defined as any distribution taken between August 25, 2005 and January 1, 2007 by an individual whose principal place of abode on August 28, 2005 is located in a Hurricane Katrina disaster area and who has sustained an economic loss due to Hurricane Katrina.
2. Eligible Retirement Plan
Defined as an IRA [408(a) or (b)]; a 401(a) qualified plan (other than a money purchase, target benefit or defined benefit plan); a 403(a) or (b) arrangement; or a 457 governmental plan.

e. Income Inclusion Spread Over 3 Year Period for QHKDs

1. The QHKD may be included in income over a 3-year period beginning with the taxable year in which it is received. For example, if $30,000 was received October 1, 2005. $10,000 would be taxable in 2005, 2006 and 2007.
2. Alternatively, an individual may elect to pay all of the tax in one year.
Note: The individual's personal tax situation and anticipated taxable income will determine which is the best choice.

f. Special Rules

1. Exemption of QHKD from trustee-to-trustee transfer rules and from withholding rules. QHKDs will be treated as if they were not eligible for rollover. Thus, the rollover distribution notice (402(f)) notice and 20% mandatory tax withholding will not apply to these distributions.
2. QHKD Distributions shall be treated as meeting plan distribution rules. QHKDs will be considered to meet the distributable event requirement for 401(k), 403(b) and 457 governmental plans.

Section 102
Recontributions of Withdrawals for Home Purchases Cancelled Due to Hurricane Katrina

Qualified distributions definition A distribution eligible for recontribution is defined as one made between February 28, 2005 and August 29, 2005, which was originally intended for use in the purchase or construction of a principal residence in the Hurricane Katrina disaster area, but was not so used because of Hurricane Katrina. The distribution must have originated either as a hardship withdrawal from a 401(k) or 403(b) plan; or an IRA first time homebuyer distribution.

Recontribution A qualified home cancellation distribution may recontributed to an Eligible Retirement Plan in one or more payments. Amounts so repaid will be treated as rollovers.

Section 103
Loans from Qualified Plans for Relief Relating to Hurricane Katrina
Time frame available is from September 23, 2005 to January 1, 2007

a. Loan Limits Increased to $100,000 and 100% of vested account balance
The maximum loan amount available to qualified individuals is doubled from $50,000 to $100,000.
Further, 100% of the participant's vested account balance is available for plan loan purposes. For example, if a qualified individual has a vested account balance of $65,000.
The entire $65,000 may be taken as a loan.
b. Delay in Repayment
A qualified individual with an outstanding loan from a qualified employer plan on or after August 25, 2005 is provided with an extension of the due date of the loan as follows:

1. Loans with a due date between August 25, 2005 and December 31, 2006 will have their due dates delayed for 1 year. During the delay period:

i. Subsequent repayments will be appropriately adjusted to include additional interest to reflect the delay; however,
ii. The 5-year maximum repayment period and level amortization requirements for plan loans will be disregarded during the delay period.

2. A qualified individual under this provision is defined as an individual whose principal 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.

Section 104
Provisions Relating to Plan Amendments
Any plan amendment made pursuant to KETRA may be made 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 of the Treasury may prescribe.
Governmental plans as defined in section 414(d) of the Code will have until the last day of the first plan year beginning on or after January 1, 2009 to make conforming amendments.

Unless the plan or contract uses these amendments, the plan will not be required to be amended for them.

Bill Grossman, QPA

KETRA

Revised Bankruptcy Law Blurs the Picture
The new bankruptcy law, which becomes effective on October 17, 2005, may make it harder for those individuals who had consumer debt and now are homeless and jobless to receive a fresh start due to new means testing provisions. New residency requirements and the disruption of the judicial system in the storm-affected states may similarly prevent affected individuals from filing under the current, more lenient statute. The timing is unfortunate as the new bankruptcy law’s intent was to halt consumer abuse of the ability to run-up huge consumer and credit card debts and then have them all erased. It is unknown at this time whether Congress will be receptive to passing additional legislation to make exceptions for individuals affected by Katrina.

McKay Hochman Articles on the new Bankruptcy Law Part 1 and Part 2