Benefits under PPA '06 expand to include beneficiaries.

• Author: Sinclair, Kirk
• Position: Pension Protection Act of 2006

The IRS has begun to follow through on the Pension Protection Act of 2006, P. L. 109-280 (PPA '06), to revise the rules for 401(k), 403(b), and 457(b) plans to allow for distributions to beneficiaries on account of hardship or unforeseeable emergency.

Hardship Distributions

Under the old rules, hardship distributions from qualified cash or deferred arrangements, such as Sec. 401(k) or governmental Sec. 403(b) plans, could not be made before the occurrence of specific events. The hardship distribution rules mandated that (1) these distributions be made on account of an "immediate and heavy financial need" of the participant or the participant's spouse or dependent and (2) the distribution be necessary to satisfy their financial need.

In an effort to use the safe-harbor standards provided in the regulations, and to ensure that allowable distributable events met the permitted criterion of being an "immediate and heavy financial" need, plans often permitted distributions of elective contributions to a participant or a participant's spouse or dependents only for expenses described in Regs. Sec. 1.401 (k)-1(d)(3)(iii)(B).

For example, plan sponsors and administrators would build into the terms of their plan documents language that limited participant distributions to those events listed specifically in the relevant regulations. Although whether a condition will satisfy the requirement of being "an immediate and heavy financial need" remains essentially determinable on the basis of the relevant facts and circumstances in a particular case, certain costs are deemed to per se satisfy this requirement. These costs include but are not limited to:

1. Costs for medical care that would otherwise be deductible under

   Sec. 213(d) (without regard to whether the cost exceeds 7.5% of taxpayers' adjusted gross income);

2. Costs directly related to the purchase of a principal residence;

3. Costs of tuition, related education fees, and room and board expenses for up to 12 months of postsecondary education for the employee or the employee's spouse, children, and dependents (for tax years after January 1,2005);

4. Costs necessary to prevent the employee's eviction from his or her principal residence or foreclosure on the mortgage on that residence;

5. Costs for burial and funeral expenses for the employee's deceased parent, spouse, child, or dependent; and

6. Costs for repairing damage to the employee's principal residence that would qualify for the casualty deduction...