While Hurricanes Harvey and Irma have subsided, recovery efforts have just begun. In an effort to help bring timely assistance to beleaguered residents of areas hard hit by the storms, the Internal Revenue Service (IRS) has issued guidance loosening restrictions on certain distributions from qualified retirement plans and the donation of paid leave benefits.
First, the IRS will permit participants in 401(k) plans, 403(b) plans, and 457(b) plans to receive a hardship distribution no later than January 31, 2018, to assist with any financial need of the participant or certain of the participant’s family members (including parents, grandparents, children, dependents or spouse) if they live or work in areas identified for individual assistance by the Federal Emergency Management Agency (FEMA). This means that even if the plan participant does not live or work in an affected area, the participant may still receive a loan or hardship distribution to assist a family member who does live or work in such areas. Moreover, hardship distributions may be approved for any hardship of eligible individuals in FEMA-identified areas (including food and shelter) and not just hardships that are included in the applicable plan documents and policies. In addition, substantiation requirements are relaxed for such distributions, and the customary six-month restriction on deferrals under a 401(k) or 403(b) plan following receipt of a hardship distribution does not apply. Hardship distributions are taxable as income and remain subject to the early withdrawal penalty, if applicable.
Similarly, the satisfaction of certain procedural requirements for participant loans made no later than January 31, 2018 (for example, spousal consent where applicable) may be postponed until such time as is reasonably practicable. The plan administrator must however still make “a good-faith diligent effort under the circumstances” to comply with those requirements when processing loan applications. Otherwise, the tax treatment of participant loans remains unchanged: for example, participant loans must generally be re-paid over a period of no more than five years.
The IRS has also indicated that participant loans and hardship distributions may be made to assist individuals in the areas identified by FEMA no later than January 31, 2018, even if the plan document does not provide for them. However, a plan that does not provide for loans and hardship distributions must be amended to provide for such features no later than the end of the first plan year beginning after December 31, 2017.
In other guidance, the IRS announced special rules applicable to leave-based donation programs. Under this guidance, employees may elect to forgo their vacation, sick or personal leave before January 1, 2019, in exchange for contributions the employer makes to charitable organizations providing relief in FEMA-identified areas hit by Hurricanes Harvey and Irma. In an exception to the usual tax treatment of such an election, leave that is so donated will not be included in the wages or income of the employee and employers may deduct as a business expense the corresponding cash contribution.