SECTION 4. GUIDANCE FOR

INDIVIDUALS RECEIVING KATRINA DISTRIBUTIONS UNDER SECTION 101 OF KETRA

This section provides guidance for qualified individuals requesting and receiving Katrina distributions. A qualified individual receiving a Katrina distribution is entitled to favorable tax treatment with respect to the distribution. First, the 10% additional tax under § 72(t) of the Code (including the 25% additional tax under § 72(t)(6) for certain distributions from SIMPLE IRAs) does not apply to any Katrina distribution. Second, a Katrina distribution is permitted to be included in income ratably over 3 years. Third, a qual

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E. Tax treatment of recontributions of a Katrina distribution using the 3-year ratable income inclusion method.

As explained above, a qualified individual is permitted to include a Katrina distribution in income ratably over a 3-year period. If a qualified individual includes a Katrina distribution ratably over a 3-year period and the individual recontributes any portion of the Katrina distribution to an eligible retirement plan at any date before the timely filing of the individual’s tax return ( i.e., by the due date, including extensions), the amount of the recontribution will reduce the ratable portion of the Katrina distribution that is includible in gross income for the tax year of the filed return.

Example 1 . Taxpayer D receives $75,000 from a section 401(k) plan on December 1, 2005. Taxpayer D is a qualified individual and treats the $75,000 distribution as a Katrina distribution. Taxpayer D uses the 3-year ratable income inclusion method for the distribution. Taxpayer D makes one recontribution of $25,000 to the section 401(k) plan on April 10, 2007. Taxpayer D files the 2006 tax return on April 15, 2007. Without the recontribution, Taxpayer D should include $25,000 in income with respect to the Katrina distribution on each of D’s 2005, 2006, and 2007 tax returns. However, as a result of the recontribution to the section 401(k) plan, Taxpayer D should include $25,000 in income with respect to the Katrina distribution on the 2005 tax return, $0 in income with respect to the Katrina distribution on the 2006 tax return, and $25,000 in income with respect to the Katrina distribution on the 2007 tax return.

Example 2 . The facts are the same as Example 1 of this section 4.E, except that Taxpayer D recontributes $25,000 to the section 401(k) plan on August 10, 2007. Taxpayer D files the 2006 tax return on April 15, 2007, and does not request an extension of time to file the return. As a result of the recontribution to the section 401(k) plan, Taxpayer D should include $25,000 in income with respect to the Katrina distribution on the 2005 tax return, $25,000 in income with respect to the Katrina distribution on the 2006 tax return, and $0 in income with respect to the Katrina distribution on the 2007 tax return.

F. Recontributions of a Katrina distribution may be carried back or forward when using the 3-year ratable income inclusion.

If a qualified individual using the 3-year ratable income inclusion method recontributes an amount of a Katrina distribution for a taxable year that exceeds the amount which is otherwise includible in gross income for the tax year of the filed return, as described in section 4.E of this notice, the excess amount of the recontribution is per

B. Income inclusion for Katrina distributions

There are two methods for a qualified individual to include in income the taxable portion of a Katrina distribution. First, a qualified individual who receives a Katrina distribution is permitted to include the taxable portion of the amount of the distribution in income ratably over a 3-year period that begins in the year of the distribution. Second, a qualified individual is permitted to elect out of the 3-year ratable income inclusion and include the entire amount of the taxable portion of the Katrina distribution in income in the year of the distribution. All Katrina distributions received in a taxable year must be treated consistently (either all distributions are included in income over a 3-year period or all distributions are included in income in the current year). If a qualified individual uses the 3-year ratable income inclusion method, such method cannot be changed after the timely filing of the individual’s tax return (including extensions) for the year of the distribution.

Example . Taxpayer A receives a $30,000 distribution from his or her IRA on October 1, 2005. Taxpayer A is a qualified individual and elects to treat the distribution as a Katrina distribution. Taxpayer A uses the 3-year ratable income inclusion for the $30,000 distribution. Taxpayer A should include $10,000 in income with respect to the Katrina distribution on each of his or her 2005, 2006, and 2007 tax returns.

C. Tax treatment of recontributions of Katrina distributions.

If a Katrina distribution is eligible for tax-free rollover treatment (taking into account section 1.D of this notice), a qualified individual is permitted, at any time in the 3-year period beginning the day after the date of a Katrina distribution, to recontribute any portion of the distribution, but not in excess of the amount of the distribution, to an eligible retirement plan. A recontribution of a Katrina distribution will not be treated as a rollover contribution for purposes of the one-rollover-per-year limitation under § 408(d)(3)(B).

D. Tax treatment of recontributions of a Katrina distribution using the 1-year income inclusion method.

If a qualified individual elects to include all Katrina distributions received in

a year in gross income for that year and recontributes any portion of the Katrina distributions to an eligible retirement plan at any time during the 3-year recontribution period, then the amount of the recontribution will reduce the amount of the Katrina distribution included in gross income for the year of the distribution. The qualified individual will report the amount of the recontribution on Form 8915, which will be filed with the individual’s income tax return.

If a qualified individual includes a Katrina distribution in gross income in the year of the distribution and recontributes the distribution to an eligible retirement plan after the timely filing of the individual’s tax return for the year of the distribution ( i.e., after the due date, including extensions), the individual will need to file an amended tax return. The qualified individual will need to file a revised Form 8915 with his or her amended return to report the amount of the recontribution and should reduce his or her gross income by the amount of the recontribution, but not to exceed the amount of the Katrina distribution.

Example 1 . Taxpayer B receives a $45,000 distribution from a section 403(b) plan on November 1, 2005. Taxpayer B is a qualified individual and treats the distribution as a Katrina distribution. Taxpayer B receives no other Katrina distribution from any eligible retirement plan in 2005. After receiving reimbursement from his or her insurance company for a casualty loss, Taxpayer B recontributes $45,000 to an IRA on March 31, 2006. Taxpayer B reports the recontribution on Form 8915 and files the 2005 tax return on April 10, 2006. For Taxpayer B, no portion of the Katrina distribution is includible as income for the 2005 tax year.

Example 2 . The facts are the same as Example 1 of this section 4.D, except that Taxpayer B timely requests an extension of time to file the 2005 tax return and makes a recontribution on August 2, 2006, before he or she files the 2005 tax return. Taxpayer B files the 2005 tax return on August 10, 2006. As in Exam- ple 1, no portion of the Katrina distribution is includible in income for the 2005 year because Taxpayer B made the recontribution before the timely filing of the 2005 return. Example 3 . Taxpayer C receives a $15,000 distribution from a section 457(b) plan on January 10, 2006. Taxpayer C is a qualified individual and treats the distribution as a Katrina distribution. Taxpayer C elects out of the 3-year ratable income inclusion on Form 8915 and includes the entire $15,000 in gross income for the 2006 taxable year. On December 31, 2008, Taxpayer C recontributes $15,000 to the section 457(b) plan. Taxpayer C will need to file an amended return for the 2006 tax year to report the amount of the recontribution and reduce Taxpayer C’s gross income by $15,000 with respect to the Katrina distribution on the 2006 original tax return.

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an employer is permitted to choose to allow this delay in loan repayments under its plan with respect to a qualified individual, and, as a result, there will not be a deemed distribution to the individual under § 72(p).

This notice provides the following safe harbor for satisfying section 103(b) of KETRA. Under this safe harbor, a qualified employer plan will be treated as satisfying the requirements of § 72(p) pursuant to section 103(b) of KETRA if a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than August 25, 2005, and ending not later than December 31, 2006 (suspension period). The loan repayments must resume upon the end of the suspension period, and the term of the loan may be extended by the duration of such suspension period. If a qualified employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, the term of the loan is extended beyond five years. Interest accruing during the suspension period must be added to the remaining principal of the loan. A plan satisfies these rules if the loan is repaid thereafter by amortization in substantially level installments over the remaining period of the loan ( i.e., five years from the date of the loan, assuming that the loan is not a principal residence loan, plus the suspension period). If an employer, under its plan, chooses to permit a suspension period that is less than the suspension period described above, the employer is permitted to extend subsequently the suspension period, but not beyond December 31, 2006.

Example . On March 31, 2005, a participant with a nonforfeitable account balance of $40,000 borrowed $20,000 to be repaid in level monthly installments of $394 each over 5 years, with the repayments to be made by payroll withholding. The participant makes 8 monthly payments until December 1, 2005. The participant’s home is in the Hurricane Katrina disaster area and the participant sustained an economic loss. The participant’s employer takes action to suspend payroll withholding repayments, for the period from December 1, 2005, through the end of 2006, for loans to qualified individuals that are outstanding on or after August 25, 2005, but only for its employees who have a principal place of abode in the Hurricane Katrina disaster area and sustained an economic loss. Because the participant is an employee

mitted to be carried forward to reduce the amount of the Katrina distribution that is includible in gross income in the next taxable year. Alternatively, the qualified individual is permitted to carry back the excess amount of the recontribution to a prior taxable year or years in which the individual included income attributable to a Katrina distribution. The individual will need to file an amended return for the prior taxable year or years to report the amount of the recontribution on Form 8915 and reduce his or her gross income by the excess amount of the recontribution.

Example . Taxpayer E receives a distribution of $90,000 from his or her IRA on November 15, 2005. Taxpayer E is a qualified individual and treats the distribution as a Katrina distribution. Taxpayer E ratably includes the $90,000 distribution over a 3-year period. Without any recontribution, Taxpayer E will include $30,000 in income with respect to the Katrina distribution on each of the 2005, 2006, and 2007 tax returns. Taxpayer E includes $30,000 in income with respect to the Katrina distribution on the 2005 tax return. Taxpayer E then recontributes $45,000 to an IRA on November 10, 2006 (and made no other recontribution in the 3-year period). Taxpayer E is permitted to do either of the following:

Option 1 . Taxpayer E includes $0 in income with respect to the Katrina distribution on the 2006 tax return. Taxpayer E carries forward the excess recontribution of $15,000 to 2007 and includes $15,000 in income with respect to the Katrina distribution on E’s 2007 tax return. Option 2 . Taxpayer E includes $0 in income with respect to the Katrina distribution on the 2006 tax return and $30,000 in income on the 2007 tax return. Taxpayer E then files an amended return for 2005 to reduce the amount included in income as a result of the Katrina distribution to $15,000.

G. Special rule for 3-year ratable income inclusion method for Katrina distributions.

If a qualified individual dies before the full taxable amount of the Katrina distribution has been included in gross income, then the remainder must be included in gross income for the taxable year that includes the individual’s death.

H. Katrina distributions will not be treated as a change in substantially equal periodic payments.

In the case of an individual receiving substantially equal periodic payments from an eligible retirement plan, the receipt of a Katrina distribution from that

plan will not be treated as a change in substantially equal payments as described in § 72(t)(4) merely because of the Katrina distribution.