Hardship Distribution & COVID-19 FEMA Disaster

We use the immediate and heavy financial need safe harbor definition, including expenses incurred as a result of a FEMA declared disaster.  The regs provide the employee's principal residence or place of employment at the time of the disaster must be in an area designated by FEMA "for individual assistance with respect to the disaster." 

I interpret this to mean that just because a state/area is declared a disaster, that isn't sufficient for a hardship but rather must be eligible for FEMA's individual assistance program.  So while FEMA's site (https://www.fema.gov/disasters) provides that most, if not all, states are declared disasters due to COVID-19, only a few states appear eligible for the individual assistance program. 

I've seen conflicting interpretations stating that if a state is declared a disaster, that is sufficient for a hardship. 

Any thoughts would be appreciated! 

There have been some other posts on this topic already, but basically if you look at FEMAs website, you will see that even states that have been designated for individual assistance have only been given that designation for "crisis counseling", not for financial assistance.  So as of now, the COVID pandemic does not meet the hardship requirement related to declared disasters.  

    It is difficult to understand what the Treasury had in mind when it used the phrase for individual assistance with respect to the disaster  when it added to the Treas. Reg. 1.401(k) -1(d)(3)(ii) list of 401(k) plan distributions “deemed to be made on account of an immediate and heavy financial need of the employee if the distribution is for”  a new  item(7)

“Expenses and losses (including loss of income) incurred by the 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 assistance with respect to the disaster.”

      The provision was added in 2019. The IRS discussion of the comments at 84 Fed. Reg. 49651 (Sept. 23, 2019), when it promulgated the final regulations including this provision does not mention the phrase “for individual assistance with respect to the disaster.” The proposed regulation which was released at 83 Fed Reg. 56763 (Nov. 14, 2018) uses the same phrase without any explanation. That document in turn references IRS Announcement 2017-152017-47 I.R.B. 534 (Nov. 20, 2017) which uses that phrase with respect to the Puerto Rico and Virgin Islands disaster declarations following Hurricanes Maria and Irma again without any explanation.

            However, the significance may be quite academic even if the CARES Act were not applicable because unlike all the other safe harbors this item does not set forth a narrow financial need, such as payments for burial or to repair a principal residence.  The paragraph does not require that there be any relation between the expenses and losses incurred by the employee and the individual assistance provided under the declaration.  The expenses and losses merely have to be on account of a disaster that meets the criteria of the rest of the sentence. This would be the case whether the individual assistance from the declaration was limited to mental counseling or “for debris removal and emergency protective measures,” as was the case with the cited Virgin Islands declaration  (FEMA 4330 Sept 20, 2017), https://www.fema.gov/disaster/notices/initial-notice-27  .