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Hardship Withdrawals From 401(k) and 403(b) Plans Are Now Available for Damage Caused by the Texas Winter Storm

Client Updates

The February 2021 winter storm in Texas not only left millions of Texas residents without power due to issues with the Texas power grid but also, for many of these residents, with significant property damage from water caused by burst water pipes in their homes due to the historic freeze. On February 19, 2021, President Biden partially approved Texas Governor Abbott’s request for a Major Disaster Declaration, which will permit participants who reside in designated Texas counties to take hardship withdrawals from 401(k) and/or 403(b) plans that provide for such withdrawals.

 

“Safe Harbor” Hardship Withdrawals In the Event of Certain Disasters

A 401(k) plan or 403(b) plan may permit active participants to take a withdrawal of funds from certain accounts as necessary to satisfy an immediately and heavy financial need. The Treasury regulations provide a list of “safe harbor” expenses that are deemed to be on account of an immediate and heavy financial need. One such safe harbor relates to expenses and losses (including loss of income) incurred by an employee on account of a disaster declared by the Federal Emergency Management Agency (“FEMA”) under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, Public Law 100-707, provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual disaster assistance.

 

Implications of President Biden’s Partial Approval of a Major Disaster Declaration

The White House issued a press release stating that President Biden partially approved Texas Governor Abbott’s request for a Major Disaster Declaration on February 19, 2021 for the state. The declaration included approval for “individual assistance” to Texas homeowners and renters in 77 Texas counties under the FEMA Individual Assistance Program due to the winter storm, as follows:

Angelina, Aransas, Bastrop, Bee, Bell, Bexar, Blanco, Brazoria, Brazos, Brown, Burleson, Caldwell, Calhoun, Cameron, Chambers, Collin, Comal, Comanche, Cooke, Coryell, Dallas, Denton, DeWitt, Ellis, Falls, Fort Bend, Galveston, Gillespie, Grimes, Guadalupe, Hardin, Harris, Hays, Henderson, Hidalgo, Hood, Jasper, Jefferson, Johnson, Kaufman, Kendall, Lavaca, Liberty, Madison, Matagorda, Maverick, McLennan, Montague, Montgomery, Nacogdoches, Nueces, Orange, Palo Pinto, Panola, Parker, Polk, Rockwall, Sabine, San Jacinto, San Patricio, Scurry, Shelby, Smith, Stephens, Tarrant, Travis, Tyler, Upshur, Van Zandt, Victoria, Walker, Waller, Wharton, Wichita, Williamson, Wilson, and Wise Counties.

Employees with a principal residence or principal place of employment located in any of the above-listed counties at the time the winter storm occurred may now satisfy the safe harbor hardship withdrawal event on account of expenses and losses (including loss of income) incurred by an employee as a result of a FEMA-designated disaster. It is important for plan administrators to be mindful that employees requesting a hardship withdrawal must provide supporting documentation for the amount requested and that supporting documentation must be retained by the plan or available to the plan from the employee. Should there be an audit of the plan by the IRS, the agent may request the supporting documentation to ensure that the amounts withdrawn were appropriate.

 

No Relief Under the Consolidated Appropriate Act , 2021

Although the Consolidated Appropriations Act, 2021 (the “CCA”) provides relief under tax-qualified retirement plans with respect to plan loans and withdrawals for certain disasters, such disasters must have occurred between December 28, 2019 and December 27, 2020 (the “Incident Period”) to qualify for relief under the CCA. Since the winter storm in Texas occurred outside of the Incident Period, employees will not qualify for relief under the CCA on account of expenses and losses incurred as a result of the winter storm.

 

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