The IRS, DOL and PBGC recently provided various forms of relief intended to help employees and employers impacted by Hurricanes Harvey and Hurricane Irma. Due to the extent of the relief provided we are covering this information in two blog posts – the first of which will focus on loans and hardship distributions from qualified plans and the second of which will look at the various reporting and funding extensions available.
Plan Loans and Hardship Distributions
Generally, participants are only permitted to take qualified plan distributions under certain limited circumstances and there are further restrictions on loans and hardship distributions. IRS Announcements 2017-11 and 2017-13 liberalize the existing distribution rules for loans and hardship distributions from qualified plans to participants (and their family members) affected by Hurricane Harvey and Hurricane Irma.
- Implementation. Hurricane relief is available for loans and hardship distributions made from August 23, 2017 (for Harvey) and September 4, 2017 (for Irma) through January 31, 2018.
- Employers may offer loans and hardship distributions to Eligible Hurricane Participants before plan amendments have been adopted. However, an employer who does not currently allow for hardships or plan loans and wishes to provide hurricane relief must adopt an amendment no later than the end of the first plan year beginning after December 31, 2017 (December 31, 2018 for calendar year plans).
- “Eligible Hurricane Participants.” The relief is available to participant who live or work in a “covered disaster area” (i.e., one of the counties identified for individual assistance by FEMA because of the devastation caused by Hurricane Harvey). However, the relief extends beyond the participant and a loan or hardship distribution may also be taken for the benefit of the participant’s family members (i.e., lineal ascendants or descendants, dependents or spouses) who live or work in a covered disaster area.
- Employers must make a good faith effort to meet normal administrative requirements (e.g., obtain any required supporting documentation); however, the loan or hardship may be granted before these requirements are met so long as the loan or hardship distribution is made no later than January 31, 2018 and the employer attempts to obtain the information (e.g., a spousal consent if necessary) as soon as possible. Any spousal consent rules will still apply.
- Hurricane Hardship Distributions and distributions to Eligible Hurricane Participants from 401(k), 403(b), 457(d) and from stand alone rollover and employee contribution accounts in defined benefit and money purchase pension plans.
- Hardships still must still be for an unforeseeable emergency (however any hardship arising from Hurricane Harvey (e.g., for food or shelter) will meet this requirement) and the distribution is still subject to the maximum hardship limits. It is unclear if the Eligible Hurricane Participant still must use all other available relief under the Plan before requesting a hardship (i.e., in service distribution, plan loans, etc.); however, in the absence of additional IRS guidance it would be prudent to continue to enforce this requirement.
- In the absence of knowledge to the contrary, an employer is allowed to rely on an Eligible Hurricane Participant’s representation about the need for and the amount of the hardship.
- Employees generally cannot make participant contributions for six months after a hardship distribution; however, an employer is not required to suspend contributions for Eligible Hurricane Participants. Employers choosing to adopt this provision will want to confirm that payroll and the record keeper can administer different requirements for Hurricane Hardships and other types of hardship distributions. In addition, the employer should make sure this rule is applied consistently across all plans that would normally be restricted following a hardship distribution (e.g., ESPP, etc.).
- Hardships are still subject to tax (ordinary income, except to the extent they consist of after tax distributions) and the 10% early distribution penalty if made before age 59 1/2.
Although the IRS provided broad parameters for Hurricane Relief, the employer still has the discretion to decide which pieces to implement (e.g., does the employer want to take maximum advantage of the relief and allow a participant to take a hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area, should the six month repayment be turned off, etc.). In addition, because hardships are not a protected benefit, it is possible to offer Hurricane Hardships as a limited window benefit for disaster relief instead of adding a permanent hardship feature.
It is anticipated that a bill will be introduced (based on relief previously granted for Hurricanes Katrina, Rita and Wilma) that would include waiver of the 10 percent excise tax penalty, inclusion of the distribution income spread over a three-year period, expanded rollover provisions, and increased loan limits.
For more information on the pay-related issues that can arise from inclement weather, see our Labor & Employment blog post here.