Additional Harvey relief comes for retirement plans
TAX ALERT |
In Announcement 2017-11, the IRS provided nearly identical relief for retirement plan distributions to taxpayers affected by Hurricane Harvey as it has commonly provided for in past disaster situations. The guidance provides that employers can streamline some of the red tape that would typically apply to hardship distributions and plan loans.
Loans or hardship distributions to employees or former employees who live or work, or whose family live or work, in a FEMA designated area 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 hurricane. The current designated area begins in certain Texas counties on Aug. 23, 2017, but may be expanded, so it is important to check the list before taking action. Retirement plans making loans or distributions under the relief provided in this announcement will not be subject to certain restrictions 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 quicker than normal procedures would typically take. In addition, plans which do not currently have provisions for loans or hardship distributions, can make them before the employer formally amends its plan to include such provisions.
This guidance can be followed for distributions made by Jan. 31, 2018. 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 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, 2017. 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 pay careful attention to the procedures provided in the relief to avoid disqualifying their plans.
Plan sponsors should also note that the IRS extended the due date for certain returns to be filed after Aug. 23, 2017 in News Release IR 2017-135. This relief extends the deadline for returns due after this date, to Jan. 31, 2018, for affected taxpayers and includes the Form 5500 series. In addition, late deposit penalties for payroll and excise taxes will be waived between Aug. 23, 2017 and Sept. 7, 2017. This relief can only be relied upon for items that would otherwise have been timely filed on or after Aug. 23, 2017 and for taxpayers in the federally declared disaster area. Other late filings will not be protected.
In related news, the U.S. Department of Labor issued a news release addressing how it will enforce ERISA’s normal deposit timing rule for employers affected by Hurricane Harvey. The rule provides that employers who withhold participant contributions to employee plans (such as 401(k) contributions, loan repayments, etc.) must remit those amounts to the plan on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets, but in no event later than the 15th business day of the month following the month in which the amounts were paid to or withheld by the employer. However, the Department will not assert a violation of ERISA for Harvey impacted employers provided such employers and service providers (such as payroll companies) act reasonably, prudently and in the interest of employees to comply as soon as practical under the circumstances.
Similarly, in the same news release the Department indicated it will not allege a violation of ERISA’s blackout notice rules if the employer was unable to comply with such rules as a result of Hurricane Harvey. The blackout notice applies when a plan will have a period that participants are unable to direct the investment of their retirement plan account (e.g. when a plan changes investment providers).
In addition, the Department noted that welfare benefit plans such as health, life, and disability plans have many claim or election deadlines. In this respect, the Department noted that the guiding principle for fiduciary conduct is that plans must act reasonably, prudently and in the interest of the workers and their families who rely on their health plans for their physical and economic well-being. Therefore, plan fiduciaries should make reasonable accommodations to prevent the loss of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established timeframes.
As a final item, the Pension Benefit Guaranty Corporation (PBGC) issued Disaster Relief Number 17-09 in which it indicated that it will extend deadlines and waive penalties for employers affected by Hurricane Harvey. The function of the PBGC is to insure the retirement incomes of workers covered by private-sector defined benefit pension plans. It does this by collecting insurance premiums from employers that sponsor these plans and in its notice it recognized that many Hurricane Harvey affected employers will have difficulty meeting certain filing and premium payment timing obligations.