As people and employers continue to deal with the aftermath of Hurricane Sandy, the Internal Revenue Service (IRS) has issued guidance to assist victims of the hurricane. In this post, we’ll talk about two specific ways in which employers can provide assistance to their employees: (1) leave donation programs and (2) loans and hardship distributions from retirement plans.
In a prior blog post, we discussed a tax-favored method that employers can use to assist their employees affected by Hurricane Sandy. Following this IRS release, the agency issued additional releases and guidance impacting how employers can assist their employees.
In one of these releases, the IRS acknowledged that employers may have adopted (or may be considering adopting) leave-based donation programs to aid victims of the hurricane. Notice 2012-69 provides guidance on the tax treatment of those payments. Generally, under such programs employees may elect to donate vacation, sick, or personal leave time in exchange for cash payments made to a qualified tax-exempt organization (per Internal Revenue Code Section 170(c)) providing relief for those affected by Hurricane Sandy. The key provisions under Notice 2012-69 include the following:
- Employees may forgo their leave time in exchange for employer payments made before January 1, 2014, to a qualified organization. Such payments will not be income or wages to the employees.
- Employees will not be entitled to claim a charitable contribution deduction under Code Section 170 with respect to the contribution.
- Employers may deduct the amount of the cash payment under the rules of Code Section 162 or Code Section 170.
Another opportunity for employers to provide assistance to their employees, from a tax perspective, comes in the form of loans and hardship distributions from tax-qualified plans. Generally, laws relating to employer-sponsored retirement plans have specific limitations and requirements relating to loans and distributions from such plans. Announcement 2012-44 liberalized the rules on such loans and distributions made to persons affected by Hurricane Sandy. See the details as follows:
- The loan or hardship distribution must be for a need arising from Hurricane Sandy to an employee (or former employee) whose principle residence or place of employment was located in a county designated as a covered disaster area. In addition, because of the broad nature of the relief, a person who lives outside of the disaster area can take a loan or hardship distribution to assist certain family members who lived or worked in the disaster area.
- The procedural and administrative rules that apply to plan loans and hardship distributions have been relaxed to allow employees to access money in a quick and easy manner. Plan administrators may rely on the representations from the employee as to the need and amount of a hardship distribution. However, a plan administrator who disregards plan procedural requirements for such loans and/or hardship distributions (for example, a requirement to provide certain documentation) must later make a reasonable attempt to comply with such requirements.
- If an employer decides to allow loans and/or hardship distributions in accordance with the guidance, but the plan does not currently provide for loans and/or hardship distributions, the plan must be amended by no later than the end of the first plan year beginning after December 31, 2012 (i.e. December 31, 2013, for calendar year plans).
- Hardship distributions must be made no later than February 1, 2013, and may be used for any hardship, not just those enumerated in the regulations.
- Plan loans must satisfy the requirements of Code Section 72(p).