n-05-92.pdf

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Part III. Procedural, Administrative, and Miscellaneous

Hurricane Katrina Relief under sections 101 and 103 of the Katrina
Emergency Tax Relief Act of 2005

Notice 2005-92

PURPOSE

This notice provides guidance relating to the application of sections 101
and 103 of the Katrina Emergency Tax Relief Act of 2005, P.L. 109-73 (KETRA)
for qualified individuals and eligible retirement plans. KETRA was enacted on
September 23, 2005. Under section 101 of KETRA, qualified individuals receive
favorable tax treatment with respect to distributions from eligible retirement plans
that are qualified Hurricane Katrina distributions (Katrina distributions). A Katrina
distribution is not subject to 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), is generally includible in income over a 3-year period, and, to the
extent the distribution is eligible for tax-free rollover treatment and is contributed
to an eligible retirement plan (recontributed) within a 3-year period, will not be
includible in income. Section 103 of KETRA increases the allowable plan loan
amount under § 72(p) of the Code and permits a suspension of payments for
plan loans outstanding on or after August 25, 2005 that are made to qualified
individuals.

BACKGROUND

Under § 402(c)(8) of the Code, an eligible retirement plan includes an
individual retirement arrangement (IRA) under § 408(a) or (b), a qualified plan
under § 401(a), an annuity plan under § 403(a), a section 403(b) plan, and a
governmental deferred compensation plan under § 457(b). Distributions from
these plans are generally includible in the distributee’s gross income in the year
of the distribution. For example, for qualified plans, § 402(a) provides that any
amount actually distributed to a distributee is taxable to the distributee in the
taxable year of the distribution under § 72. Similar rules exist for section 403(b)
plans under § 403(b)(1), for governmental section 457(b) plans under § 457(a),
and for IRAs under § 408(d)(1).

Section 402(f) provides that a plan is required to provide a distributee,
within a reasonable period of time before an eligible rollover distribution is made,
with a written explanation of the distributee’s rollover rights and the tax and other
potential consequences of the distribution or rollover.

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Section 402(c)(4) provides that any distribution of all or a portion of the
balance to the credit of an employee under a qualified plan is an eligible rollover
distribution with certain exceptions. These exceptions include substantially equal
periodic payments over a specified period of at least 10 years, or for the life or
the life expectancy of the employee (or the employee and the employee’s
designated beneficiary); minimum distributions required under § 401(a)(9); and
any distribution that is made upon the hardship of an employee. This same
definition of eligible rollover distributions applies to distributions from section
403(b) plans under § 403(b)(8) and governmental section 457(b) plans under §
457(e)(16). Generally, any distribution from an IRA is eligible for rollover except
a required minimum distribution or certain distributions from inherited IRAs.

Under § 401(a)(31), if a distributee elects to have an eligible rollover
distribution paid directly to an eligible retirement plan and specifies the eligible
retirement plan to receive the distribution, a qualified plan must pay the
distribution to that eligible retirement plan in a direct rollover. Similar rules apply
to section 403(b) plans under § 403(b)(10) and governmental section 457(b)
plans under § 457(d)(1).

Q&A-14 of §1.401(a)(31)-1 of the Income Tax Regulations provides that if
a plan accepts an invalid rollover contribution, the contribution will be treated, for
purposes of applying the qualification requirements to the receiving plan, as if it
were a valid rollover contribution, if two conditions are satisfied. First, when
accepting the amount from the employee as a rollover contribution, the plan
administrator of the receiving plan reasonably concludes that the contribution is a
valid rollover contribution. Second, if the plan administrator later determines that
the rollover contribution was an invalid rollover contribution, any amount
attributable to the invalid rollover contribution (including earnings) must be
distributed to the employee within a reasonable amount of time after the
determination.

Under § 402, if an eligible rollover distribution is contributed to an eligible
retirement plan in a direct rollover or within 60 days from the date of distribution
as a rollover contribution, the amount rolled over is not includible in the
distributee’s gross income.

Section 72(t)(1) imposes an additional tax on early distributions from
eligible retirement plans. In general, this additional tax is equal to 10% of the
portion of the distribution that is includible in income. For any amount distributed
from a SIMPLE IRA during the 2-year period described in § 72(t)(6), the rate of
the additional tax is increased from 10% to 25%. Section 72(t)(2) provides a
number of exceptions to this additional tax, including, for example, exceptions for
distributions made on or after the employee attains age 59½, distributions made
to a beneficiary on or after the employee’s death, distributions made because of
the employee’s disability, and distributions that are a part of substantially equal
periodic payments made over the employee’s life or life expectancy.

3

Section 401(k)(2)(B)(i) generally provides that amounts attributable to
elective contributions under a qualified cash or deferred arrangement may not be
distributable to participants or beneficiaries earlier than severance from
employment, death or disability, plan termination, or attainment of age 59½. This
same restriction applies to any amount attributable to qualified nonelective
contributions and qualified matching contributions under qualified cash or
deferred arrangements. An amount equal to the dollar amount of elective
contributions can generally be distributed upon hardship of the employee.
Parallel rules apply to custodial accounts under § 403(b)(7)(A)(ii), to annuity
contracts under § 403(b)(11), and to governmental section 457(b) plans under
§ 457(d)(1)(A).

Section 72(p) imposes certain requirements relating to plan loans. Unless
these requirements are satisfied, an amount received by a participant as a loan is
treated as having been received as a distribution from the plan (deemed
distribution). Deemed distributions are includible in income and are subject to
the 10% additional tax under § 72(t), unless an exception applies.

Under § 72(p)(2)(A), a plan loan (when added to the outstanding balance
of all other loans outstanding) must not exceed the lesser of (1) $50,000 reduced
by the excess of the highest outstanding balance of loans from the plan during
the 1-year period ending on the day before the date on which the loan is made
over the outstanding balance of loans from the plan on the date that the loan is
made or (2) the greater of $10,000 or one-half of the present value of the
participant’s nonforfeitable accrued benefit under the plan. Section 72(p)(2)(B)
provides that a loan must be repaid within 5 years. However, an exception to the
5-year repayment rule applies for loans used to acquire any dwelling unit that will
be used (determined at the time the loan is made) as the participant’s principal
residence. Section 72(p)(2)(C) requires substantially level amortization of a plan
loan (with payments not less frequently than quarterly) over the term of the loan.

Q&A-10(a) of § 1.72(p)-1 of the regulations provides that the failure to
make any installment payment when due, in accordance with the terms of a loan,
violates § 72(p)(2)(C) and, accordingly, results in a deemed distribution at the
time of such failure. However, the plan administrator may allow a cure period
and § 72(p)(2)(C) will not be considered to have been violated if the installment
payment is made not later than the end of the cure period, which period cannot
continue beyond the last day of the calendar quarter following the calendar
quarter in which the required installment payment was due. If there is a failure to
pay the installment payments required under the terms of the loan (taking into
account any cure period allowed under Q&A-10(a)), then the amount of the
deemed distribution equals the entire outstanding balance of the loan (including
accrued interest) at the time of such failure.

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SECTION 1: QUALIFIED HURRICANE KATRINA DISTRIBUTIONS

A. Special tax treatment for Qualified Hurricane Katrina distributions
.

Section 101 of KETRA provides for special tax treatment for a Katrina
distribution. Section 101 of KETRA provides an exception to 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), allows the distribution to be included
in income ratably over 3 years, and provides that the distribution will be treated
as though it were paid in a direct rollover to an eligible retirement plan if the
distribution is eligible for tax-free rollover treatment and is recontributed to an
eligible retirement plan within 3 years of the date of the distribution. Section 101
of KETRA also permits special treatment for Katrina distributions under employer
retirement plans, as described in section 2 of this notice.

B. Definition of qualified individual
.

For purposes of this notice, a qualified individual is an individual whose
principal place of abode on August 28, 2005, is located in the Hurricane Katrina
disaster area as defined in section 2(1) of KETRA and who has sustained an
economic loss by reason of Hurricane Katrina. For purposes of the relief
provided under KETRA, the term "Hurricane Katrina disaster area" as set forth in
section 2(1) means the entire states of Louisiana, Mississippi, Alabama, and
Florida.
1

C. Definition of Katrina distribution
.

Section 101(d)(1) of KETRA defines a Katrina distribution as any
distribution from an eligible retirement plan made on or after August 25, 2005,
and before January 1, 2007, to a qualified individual. Section 101(b) of KETRA
limits the amount of distributions that can be treated as Katrina distributions to no
more than $100,000.

A qualified individual is permitted to designate a distribution described
above as a Katrina distribution. This designation is permitted to be made with
respect to any distribution that would meet the requirements of a Katrina
distribution without regard to whether the distribution was on account of
Hurricane Katrina. Thus, periodic payments and required minimum distributions
received by a qualified individual from an eligible retirement plan on or after
August 25, 2005 and before January 1, 2007, are permitted to be treated as
Katrina distributions. Similarly, any distribution received by a qualified individual

1
This definition applies solely for purposes of relief provided under KETRA and does not apply for
purposes of relief under other provisions. For example, see Notice 2005-73, 2005-42 I.R.B. 723, which
defines taxpayers affected by Hurricane Katrina and designates disaster areas for purposes of the relief
provided under § 7508A.

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as a beneficiary can be treated as a Katrina distribution. In addition, a reduction
or offset of a participant’s account balance in order to repay a plan loan, as
described in Q&A-9(b) of § 1.402(c)-2 of the regulations, is permitted to be
treated as a Katrina distribution. However, any amount described in Q&A-4 of
§1.402(c)-2 of the regulations is not permitted to be treated as a Katrina
distribution. Thus, the following amounts are not Katrina distributions: corrective
distributions of excess contributions under § 415, excess elective deferrals under
§ 402(g), excess contributions under § 401(k), and excess aggregate
contributions under § 401(m); loans that are treated as deemed distributions
pursuant to § 72(p); dividends paid on applicable employer securities under
§ 404(k); and the costs of current life insurance protection. See section 1.D of
this notice for rules relating to which Katrina distributions are permitted to be
recontributed to an eligible retirement plan.

The definition of Katrina distribution under section 101(d)(1) of KETRA
does not limit the designation of a Katrina distribution to amounts withdrawn
solely to meet a need arising from Hurricane Katrina. Thus, even though a
qualified individual is required to have sustained an economic loss, Katrina
distributions are permitted without regard to the qualified individual’s need and
the amount of the distribution is not required to correspond to the amount of the
economic loss suffered by the qualified individual.

As explained in section 2.C of this notice, an employer retirement plan is
also permitted to treat a plan distribution described above as a Katrina
distribution. It is possible that a qualified individual’s designation of a Katrina
distribution may be different from the employer retirement plan’s treatment of the
distribution. This different treatment could occur, for example, if a qualified
individual has more than one plan distribution that meets the requirements of a
Katrina distribution. This different treatment could also occur if a qualified
individual has distributions from more than one eligible retirement plan.

D. Certain Katrina distributions are permitted to be recontributed
.

Subject to certain exceptions, distributions from an eligible retirement plan
that satisfy the requirements of a Katrina distribution under section 1.C of this
notice are permitted to be treated as Katrina distributions. Such distributions
may be included in income ratably over 3 years and are not subject to the 10%
additional tax under § 72(t) of the Code. However, only a Katrina distribution that
is eligible for tax-free rollover treatment under § 402(c) (and 402(e)(6)),
403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) is permitted to be recontributed to
an eligible retirement plan, and such recontribution will be treated as having been
made in a direct rollover to that eligible retirement plan.

In the case of a distribution from an eligible retirement plan other than an
IRA, only a Katrina distribution that is an eligible rollover distribution within the
meaning of § 402(c)(4) is permitted to be recontributed to an eligible retirement

6
plan. Thus, periodic payments (for a period of at least 10 years, or the life or the
life expectancy of the employee (or the lives or joint life expectancies of the
employee and the employee’s designated beneficiary)) and required minimum
distributions are not permitted to be recontributed to an eligible retirement plan
even though those distributions are permitted to be treated as Katrina
distributions if they satisfy the requirements under section 1.C of this notice. In
the case of a distribution from an IRA, only a Katrina distribution that is eligible
for rollover treatment under § 408(d)(3) is permitted to be recontributed to an
eligible retirement plan. Thus, required minimum distributions are not permitted
to be recontributed to an eligible retirement plan. Any Katrina distribution
(whether from an employer retirement plan or an IRA) paid to a qualified
individual as a beneficiary of an employee or IRA owner (other than the surviving
spouse of the employee or IRA owner) cannot be recontributed. See section 4.C
of this notice for rules relating to recontributions of Katrina distributions.

In general, a distribution from an employer retirement plan made on
account of hardship is not an eligible rollover distribution. However, if such a
distribution satisfies the requirements under section 1.C of this notice, then the
distribution is not treated as made on account of hardship for purposes of this
notice and, thus, any portion of the distribution is permitted to be recontributed to
an eligible retirement plan. See section 4.C of this notice for rules relating to
recontributions.

E. Definition of principal place of abode
.

An individual's principal place of abode is where the individual lives unless
temporarily absent due to special circumstances. A temporary absence from the
household due to special circumstances, such as illness, education, business,
vacation, or military service, will not change an individual’s principal place of
abode. See §§ 1.2-2, 1.152-1(b), and 1.152-2(a)(2)(ii) of the regulations for
information relating to a temporary absence from a principal place of abode. If
an individual's principal place of abode was in the Hurricane Katrina disaster area
immediately before August 28, 2005, and the individual evacuated because of
Hurricane Katrina, the individual's principal place of abode will be considered to
be in the Hurricane Katrina disaster area on August 28, 2005.

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

7
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 59½.

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.

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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.

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.

SECTION 3. GUIDANCE FOR ELIGIBLE RETIREMENT PLANS MAKING, OR
ACCEPTING RECONTRIBUTION OF, KATRINA DISTRIBUTIONS

This section provides guidance for eligible retirement plans (i.e., employer
retirement plans and IRAs) making, or accepting recontribution of, Katrina
distributions.

A. Tax Reporting on Katrina distributions
.

9
An eligible retirement plan must report the payment of a Katrina
distribution to a qualified individual on Form 1099-R, Distributions from Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
This reporting is required even if the qualified individual recontributes the Katrina
distribution to the same eligible retirement plan in the same year. If a payor is
treating the payment as a Katrina distribution and no other appropriate code
applies, the payor is permitted to use distribution code 2 (early distribution,
exception applies) in box 7 of Form 1099-R. However, a payor is also permitted
to use distribution code 1 (early distribution, no known exception) in box 7 of
Form 1099-R.

B. Reliance on representations relating to the recontribution of a Katrina
distribution.

In general, a qualified individual who receives a Katrina distribution that is
eligible for tax-free rollover treatment is permitted to recontribute, at any time in a
3-year period, any portion of the distribution to an eligible retirement plan that is
permitted to accept eligible rollover contributions. The relief in Q&A-14 of
§ 1.401(a)(31)-1 of the regulations applies to an employer retirement plan
accepting recontributions of Katrina distributions. In order to obtain the relief
described in Q&A-14 of § 1.401(a)(31)-1, a plan administrator accepting the
recontribution of a Katrina distribution must reasonably conclude that the
recontribution is eligible for direct rollover treatment under section 101(c) of
KETRA and that the recontribution is made in accordance with the rules under
section 4.C of this notice. In making this determination, the rule in section 2.E of
this notice applies. Thus, a plan administrator may rely on the reasonable
representations of a qualified individual with respect to the individual’s principal
place of abode on August 28, 2005 and whether the individual suffered an
economic loss by reason of Hurricane Katrina, unless the plan administrator has
actual knowledge to the contrary.

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 qualified 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

10
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.
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.

2
Form 8915 is expected to be available soon.

11
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.

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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
Example 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.
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

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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 permitted 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 rules for 3-year ratable income inclusion method for Katrina
distributions.

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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.
SECTION 5. APPLICATION OF SECTION 103 OF KETRA TO PLAN LOANS
This section provides guidance regarding the application of section 103 of
KETRA to plan loans, including a safe harbor that is treated as satisfying section
103(b) of KETRA.
A. Increase in the allowable loan amount.

Special rules apply to a loan made from a qualified employer plan (as
defined in § 1.72(p)-1, Q&A-2) to a qualified individual on or after September 24,
2005 (the day after the date of enactment of KETRA) and before January 1,
2007. For these loans, section 103(a) of KETRA changes the limits under §
72(p)(2)(A) of the Code. In applying § 72(p) to a plan loan, the $50,000
aggregate limit in § 72(p)(2)(A)(i) is increased to $100,000 and the rule in §
72(p)(2)(A)(ii) limiting the aggregate amount of loans to one half of the
employee’s vested accrued benefit is increased to 100 percent of the employee’s
vested accrued benefit.
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B. Suspension of payments and extension of term of loan.

A special rule applies if a qualified individual has an outstanding loan from
a qualified employer plan on or after August 25, 2005. Section 103(b) of KETRA
provides that, for purposes of § 72(p), in the case of a qualified individual with a
loan from a qualified employer plan outstanding on or after August 25, 2005, if
the due date for any repayment with respect to the loan occurs during the period
beginning on August 25, 2005, and ending on December 31, 2006, such due
date shall be delayed for one year. In addition, any subsequent repayments for

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The Department of Labor has advised the Department of the Treasury and the Service
that it will not treat any person as having violated the provisions of Title I of the
Employee Retirement Income Security Act (ERISA), including the adequate security and
reasonably equivalent basis requirements in ERISA section 408(b)(1) and 29 CFR
2550.408b-1, solely because the person made a plan loan to a qualified individual in
compliance with KETRA section 103, Code § 72(p), and the provisions of this notice.

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the loan shall be appropriately adjusted to reflect the delay and any interest
accruing for such delay, and the period of delay shall be disregarded in
determining the 5-year period and the term of the loan under § 72(p)(2)(B) and
(C). Thus, 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 of the employer who has
a principal place of abode in the Hurricane Katrina disaster area and notifies the
employer that he or she has sustained an economic loss, no further repayments
are made on the participant’s loan until January 1, 2007 (when the balance is
$19,045). At that time, repayments on the loan resume, with the amount of each
monthly installment increased to $423 in order to repay the loan by April 30, 2011
(which is the date the loan originally would have been fully repaid, plus the 13-
month loan suspension period that resulted from Hurricane Katrina).

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C. Qualified employer plan may rely on reasonable representations
.
A qualified employer plan is permitted to rely on a participant’s reasonable
representations that such participant is a qualified individual and therefore
qualifies for the special treatment for loans under section 103 of KETRA, unless
the plan administrator (or other responsible person) with respect to the qualified
employer plan has actual knowledge to the contrary.

Drafting Information
The principal authors of this notice are Pamela R. Kinard and Vernon
Carter of the Office of the Division Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For further information regarding this notice,
please contact the Employee Plans taxpayer assistance telephone service at
(877) 829-5500 (a toll free number) between the hours of 8:00 a.m. and 6:30
p.m. Eastern Time, Monday through Friday.