By Sheila Ninneman, JD.
From the Internal Revenue Service (IRS)
The IRS announced on August 30, 2017 that participants in 401(k) plans, 403(b) tax-sheltered annuities and 457(b) deferred compensation plans may be able to use newly announced streamlined rules to alleviate the financial hardships caused by Hurricane Harvey with loans and hardship distributions. In Announcement 2017-11, the IRS provides that affected plan sponsors will be relieved from normally required verification procedures for loans and hardship distributions in order for participants in areas adversely affected by the massive storm to speed and ease their recovery. Hardship distributions made pursuant to this Announcement must be made on or after August 23, 2017 and no later than January 31, 2018. For plan loans to qualify for this relief, they must satisfy the requirements of Section 72(p) of the Internal Revenue Code (Code), like any other plan loan.
The Affected Area and Participants
The relief provided in this Announcement is for participants (or their spouse, child, parent, grandparent or dependent) whose principal residence or place of employment on August 23, 2017 was in one of the counties identified by the Federal Emergency Management Agency (FEMA) as being eligible for assistance from FEMA. Participants who live outside the impacted area are also eligible for this relief in order to assist a spouse, child, parent, grandparent or dependent who lives or works inside the impacted area. The counties are located in Texas and listed here. If additional areas in Texas or other states are identified by FEMA for assistance because of damage related to Hurricane Harvey, the relief outlined in this Announcement will also apply to those areas.
Preliminary to exercising the relief, the qualified plan must already contain language authorizing the loan or distribution, or must be amended to include the language, no later than the end of the first plan year beginning after December 31, 2017. The required language includes procedural rules regarding both hardship distributions and loans. For example, in the case of hardship distributions, the participant must certify the cause of the hardship through certain documentation prior to the distribution, and the cause must be one listed by the plan. In some cases, plan loans cannot be made without first obtaining spousal consent. Under this Announcement, these rules are somewhat relaxed.
Here’s the relief:
- The qualified plan can begin to make distributions or plan loans before it is formally amended to provide for those withdrawals.
- The qualified plan can make the hardship distribution or plan loan prior to receiving normally required documentation or consent, as long as the plan makes a reasonably diligent effort afterwards to obtain the documentation (e.g., a death certificate) or consent.
- For hardship distributions, the plan can ignore the normal list of accepted causes for hardship distributions, so that the distribution can be used for such needs as food or shelter, unless the plan administrator has actual knowledge that the hardship does not qualify for this relief.
- The 6-month ban on elective deferrals will not apply to hardship distributions taken pursuant to this Announcement.
Here’s what stays the same:
- Unless the amount distributed consists of already-taxed funds, the amount of the distribution is includible in gross income, and generally subject to the 10% additional tax under Code Section 72(t).
- The amount available for distribution must not exceed the maximum amount that would be permitted under the plan under the Code and applicable regulations.
- Normal spousal consent rules, if applicable, are not relieved by this Announcement.
From the Department of Labor (DOL)
On August 30, 2017, the DOL issued guidance, which can be found here, related to enforcement relief for failures by plan sponsors located in the identified disaster areas to timely deposit participant contributions or issue blackout notices on account of the impact of Hurricane Harvey. The DOL’s Employee Benefits Security Administration (EBSA) also provided guidance on August 29, 2017 for health and retirement plan participants affected by Hurricane Harvey. The FAQs, which can be found here, address such topics as what employees of employers damaged by Hurricane Harvey can do if they fear loss of their health care coverage, COBRA coverage or retiree health care coverage. In addition, the FAQs cover questions regarding retirement plans, including possible missed pension payments, possible use of the retirement plan as a financial resource for recovery costs and the continuing integrity of the pension plan and an individual’s retirement benefits.
From the Pension Benefit Guaranty Corporation (PBGC)
The PBGC issued Disaster Relief Number: 17-09 on August 29, 2017. The announcement, which can be found here, describes certain relief applicable to plans where the plan administrator, plan sponsor or other entity is located in the federally declared disaster area, or the company cannot reasonably obtain information or other assistance needed to meet the deadline from a service provider, bank or insurance company that was directly impacted by Hurricane Harvey. The relief waives certain penalties and extends certain deadlines until January 31, 2018. It includes the waiver of late payment penalties for any premiums due between August 23, 2017 and January 31, 2018, provided that the filing is actually made by January 31, 2018. (Note that the PBGC is not waiving the applicable interest related to such payments.) The announcement also provides instructions in connection with single-employer plan terminations, reportable event notices, Form 5500s, and certain multiemployer deadlines. In addition, the PBGC indicated that it may also grant relief on a case-by-case basis to fully take into account the damage caused by Hurricane Harvey.Findley Post, Retirement Plans