IRS provides additional relief related to Louisiana storms
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UPDATE (9/19/2016): In Notice 2016-55, the IRS asserted that it will not challenge employers that donate cash to charities in lieu of employees’ paid time off without treating the payments as wages to the employees. Employers may wish to do this through a program that allows employees to forego vacation, sick or personal leave in exchange for their employer making a cash donation to a charitable organization.
Typically, a leave-based donation program like this would be taxable wages to the employees because they are in constructive receipt of the income, having already earned the right to the paid time off. Therefore, the significance of the notice is not the right to implement such a program but the right to do so without making the payments subject to income or payroll taxes as wages. In addition, the IRS will treat the payments as trade or business expenses, rather than charitable contributions, so otherwise applicable limitations will not apply.
This relief applies to donations made to qualified charities before Jan. 1, 2018. It is also specific to payments for the relief of victims of the Louisiana storms. Thus, employers wishing to make payments under this exception should keep substantiation to support that their donations qualify.
ORIGINAL (8/31/2016): In Announcement 2016-30, the IRS provided an expedited process for employees to use assets in certain qualified retirement plans for hardships related to the flooding in Louisiana that occurred during August 2016. Typically, 401(k), 403(b) and 457(b) plans can make loans and hardship distributions if the plan document allows for them and the plan follows verification procedures and other requirements provided in published guidance and the plan document. The IRS announcement allows an exception from those requirements to facilitate easier access to the funds for employees.
Loans or hardship distributions to employees or former employees who live or work, or whose family live or work, in an affected area in Louisiana can be made so long as the plan administrator does not have knowledge that contradicts an individual’s representation for the need of the amount related to the storms. Retirement plans making loans or distributions under the relief provided in this announcement will not be subject to other restrictions provided under the guidance that would normally apply to such transactions, such as restrictions on contributions after receiving a hardship distribution.
It should be noted that the relief does not change the tax consequences of any loan or hardship distribution being made under the relief. Hardship distributions will still be taxable as an in-service distribution and potentially subject to early distribution penalties. The relief simply temporarily removes certain administrative burdens of the plan so that funds can be released more quickly than normal procedures would typically take and so that plans which do not currently have provisions for hardship distributions can make them before the plan provides for them.
This relief only applies to loans and hardship distributions made between Aug. 11, 2016, and Jan. 17, 2017, thus, employers must get a process in place relatively quickly if they intend to use the relief provided. While the relief is intended to expedite the process so that affected individuals can access funds needed for assistance, it still requires the employers to follow up on the distributions with certain actions. For example, if the plan does not currently allow for hardship distributions, the plan must be amended no later than the first plan year beginning after Dec. 31, 2016. In addition, the relief does not remove all requirements for documentation but allows the distributions to go out before the documentation is received. Therefore, employers should welcome the relief for the opportunity to help affected employees but should still pay careful attention to the procedures provided in the relief to avoid disqualifying their plans.