SECTION 2. GUIDANCE FOR

EMPLOYER RETIREMENT PLANS MAKING KATRINA DISTRIBUTIONS

A. Katrina distributions are generally treated as satisfying certain plan distribution restrictions.

Under section 101 of KETRA, a Katrina distribution designated by an employer retirement plan is treated as meeting the distribution restrictions for qualified cash or deferred arrangements under

§ 401(k)(2)(B)(i) of the Code, for custodial accounts under § 403(b)(7)(A)(ii), for annuity contracts under § 403(b)(11), and for governmental deferred compensation plans under § 457(d)(1)(A). Thus, for example, an employer is permitted to expand the distribution options under its plan to allow an amount attributable to an elective, qualified nonelective, or qualified matching contribution under a qualified cash or deferred arrangement to be distributed as a Katrina distribution even though the distribution is before an otherwise permitted distributable event, such as severance from employment, disability, or attainment of age 59 ¹ /2.

Except as described above, section 101 of KETRA does not change the requirements for when plan distributions are permitted to be made from employer retirement plans. Thus, for example, a qualified plan that is a pension plan ( e.g. a money purchase plan) is not permitted to make in-service distributions merely because the distribution, if made, would qualify as a Katrina distribution. Further, a pension plan is not permitted to make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as a Katrina distribution.

B. Direct rollover and 20% withholding requirements are not applicable to Katrina distributions.

If a distribution is treated as a Katrina distribution by an employer retirement plan, the rules for eligible rollover distributions under §§ 401(a)(31), 402(f), and 3405 of the Code are not applicable with respect to the distribution. Thus, the plan is not required to offer the qualified individual a direct rollover with respect to the distribution. In addition, the plan administrator does not have to provide a § 402(f) notice. Finally, the plan administrator or payor of the Katrina distributions is not required to withhold an amount equal to 20% of the distribution, as is usually required under § 3405(c)(1). However, a Katrina distribution is subject to the voluntary withholding requirements of § 3405(b) and § 35.3405–1T of the Temporary Employment Tax Regulations.

C. Treatment of distributions as Katrina distributions.

An employer is permitted to choose whether to treat distributions under its plans as Katrina distributions. Further, the employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which distributions are treated as Katrina distributions under its retirement plans. However, if an employer retirement plan treats any distribution of an amount subject to § 401(k)(2)(B)(i), 403(b)(7)(A)(ii), 403(b)(11) or 457(d)(1)(A) as a Katrina distribution, the plan must be consistent in its treatment. Thus, the amount of the distribution must be taken into account in determining the $100,000 limit on Katrina distribution payments made under the retirement plans maintained by the employer.

D. Distribution limits on Katrina distributions.

The total amount of distributions treated by an employer as Katrina distributions under its retirement plans with respect to a qualified individual is not permitted to exceed $100,000. For purposes of this rule, the term “employer” means the employer maintaining the plan and those employers required to be aggregated with the employer under § 414(b), (c), (m), or (o). However, a plan will not fail to satisfy any requirement under the Code merely because a qualified individual’s total Katrina distributions exceed $100,000, taking into account distributions from IRAs or other eligible retirement plans maintained by unrelated employers.

E. Reliance on reasonable representations.

In making a determination that a distribution is a Katrina distribution, a plan sponsor or plan administrator of an employer retirement plan is permitted to rely on reasonable representations from a distributee with respect to the distributee’s principal place of abode on August 28, 2005, and whether the distributee suffered an economic loss by reason of Hurricane Katrina, unless the plan sponsor or plan administrator has actual knowledge to the contrary.

December 19, 2005 1168 2005–51 I.R.B.

ified individual is permitted to recontribute any portion of a Katrina distribution that is eligible for tax-free rollover treatment to an eligible retirement plan within 3 years from the day after the date of the distribution, and the recontribution will be treated as if it were paid in a direct rollover to an eligible retirement plan. See section 1.D of this notice for rules relating to which Katrina distributions are permitted to be recontributed. Qualified individuals will use Form 8915 ², Qualified Hurricane Katrina Retirement Plan Distributions and Repayments, to report any recontribution made during the taxable year and to determine the amount of the Katrina distribution includible in income for the taxable year.

A. Election to designate a distribution as a Katrina distribution.

A qualified individual is permitted to designate any distribution described in section 1.C of this notice as a Katrina distribution provided the total amount treated by the individual as Katrina distributions does not exceed $100,000. For example, if a qualified individual received a distribution of $50,000 in 2005 and a distribution of $75,000 in 2006 and both distributions satisfy the definition of a Katrina distribution, only $100,000 of the $125,000 received by the qualified individual can be treated as a Katrina distribution. Thus, if such individual treated the 2005 distribution of $50,000 as a Katrina distribution on his or her 2005 tax return, the individual can only treat $50,000 of the 2006 distribution as a Katrina distribution on his or her 2006 tax return. Assuming no § 72(t)(2) exception applies, the remaining $25,000 of the 2006 distribution is an early distribution. This amount will be subject to the 10% additional tax, must be included on the individual’s 2006 tax return, and will not be eligible for 3 year recontribution to an eligible retirement plan.

Example . A section 401(k) plan distributes $35,000 to a qualified individual on December 1, 2005. The qualified individual also receives a distribution from his or her IRA on December 1, 2005 of $15,000. The individual is permitted to treat both the $35,000 from the plan and the $15,000 from the IRA as Katrina distributions on the individual’s 2005 tax return.

F. An employer retirement plan will be treated as operating in accordance with its terms if certain requirements are satisfied.

The Internal Revenue Service will be issuing guidance in the future relating to plan amendments for KETRA. An employer retirement plan will not be treated as failing to operate in accordance with its terms merely because the plan implements the provisions of sections 101 and 103 of KETRA if the plan sponsor amends its plan by the applicable dates described below. For employer retirement plans other than a governmental plan, the date by which any plan amendment to reflect KETRA is required to be made will not be earlier than the last day of the first plan year beginning on or after January 1, 2007. For governmental plans under § 414(d) of the Code, the date by which any plan amendment to reflect KETRA is required to be made will not be earlier than the last day of the first plan year beginning on or after January 1, 2009.