Katrina

[stevena]

Could someone clarify whether it is required that we withhold the 20% for Katrina distributions?

These are being processed as terminations, becasue the company is shutting down. They aren't hardships.

What I am using came from ASPPA, and is below. But, I have heard conflicting opinions....

Thanks!

"If an individual receives a qualified Hurricane Katrina distribution in 2005, that amount is included in income, generally ratably over the year of the distribution and the following two years, but is not subject to the 10-percent additional tax on early distributions. If, in 2007 the amount of the qualified Hurricane Katrina distribution is recontributed to an eligible retirement plan, the individual may file an amended return (or returns) to claim a refund of the tax attributable to the amount of the distribution previously included in income. Under the new law, these qualified Hurricane Katrina distributions are not subject to the mandatory 20-percent withholding."

[E as in ERISA]

Think of it like this. You have a form listing the possible events of distribution: severance, hardship, 59-1/2, termination of plan. The participant checks the box indicating which applies. Twenty percent withholding applies to some of those. Now you add Qualified Hurricane Katrina Distribution. Twenty percent withholding does not apply to that. In your case, the boxes are all marked "termination of plan." But if you think that they qualify under Katrina you can allow them the opportunity to check that box instead, certify or document that status in some way, and waive twenty percent withholding. It just depends on whether you process it as a termination distribution or a Qualified Hurricane Katrina Distribution and follow the IRS and plan rules for that type of distribution.

[E as in ERISA]

My understanding is that the IRS would be very supportive of you encouraging participants to take the Qualified Hurricane Katrina Distribution. But you would not be penalized for failure to do so.

[stevena]

Actually, in our cases, we have "Qualified Katrina Distribution" written all over the distribution forms in big letters. And no box is checked.

The fund group is telling us that they have to withhold the 20%.

They are wrong, arent they?? My participants do not want withholding.

[E as in ERISA]

If you process it as a Qualified Hurricane Katrina Distribution, no withholding is required provided you follow all the IRS and plan rules. The problem is that we don't know for sure what those rules are until the IRS issues guidance indicating how that status is determined, etc. But they say this is "relief" and you should err on the side of helping the participants.

If you're not comfortable processing as that without guidance and you process as a distribution upon plan termination and follow those rules, then withholding is probably required.