New federal legislation and IRS guidance provide special tax and retirement plan relief for employees and employers affected by the recent hurricanes, and extended deadlines for benefit arrangements and certain tax reporting requirements for impacted employers and plan sponsors. The Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63 ("Disaster Relief Act" or "the Act"), signed by President Trump on September 29, 2017, allows certain employer-sponsored retirement plans (401(k), 403(b), government 457(b) plans) to offer additional hardship and loan options to employees affected by Hurricanes Harvey, Irma, and Maria. As such, the Act adds to the relief already provided in Internal Revenue Code itself and recent IRS announcements.
Disaster Relief Act
The Disaster Relief Act sets up a new type of distribution, a qualified hurricane distribution (QHD), which can be made through December 31, 2018 to an individual whose principal place of abode is within a presidentially declared disaster area affected by one of the hurricanes. Such an individual can receive no more than $100,000 in QHDs from all plans combined. A QHD is exempt from the 10% tax on early distributions, is subject to 10% withholding rather than the usual 20%, and is taxable ratably over a three-year period. A QHD will be treated as rolled over (further deferring the tax) if it is recontributed to another plan during the three years following receipt (as compared to the 60 days which would normally apply to a rollover).
The Act also provides two types of relief for loans for such individuals. First, outstanding loan repayments can be suspended for up to twelve months. Second, the limit on loans taken out during the period ending December 31, 2018 is raised to $100,000, reduced by the highest outstanding loan balance during the prior twelve months.
Taking advantage of these rules will typically require timely plan amendments. To determine what plan amendments are necessary, you should contact a Venable Benefits attorney.
Employer Provided Disaster Relief Payments
Ordinarily, any payment that an employer provides to an employee is taxable to the employee, and is subject to withholding and employment taxes. However, the Internal Revenue Code section 139 provides that qualified disaster relief payments are not subject to income or employment taxes for recipients. An employer payment will be treated as a qualified disaster relief payment that is not subject to tax if it is paid to or for the benefit of an individual:
- to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, or
- to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.
A federally declared disaster, such as one caused by one of the three hurricanes, is a qualified disaster.
Plan Loans and Hardship Withdrawals
In Announcements 2017-11 and 2017-13, for the period ending January 31, 2018, the IRS relaxed the strict standards for plan loans and hardship withdrawals from 401(k) plans, 403(b) plans, and 457(b) plans that ordinarily would not permit hardship withdrawals for those affected by hurricanes. The relief applies to any employee or former employee:
- Whose principal residence or place of employment on the relevant date was located in one of the areas affected by the hurricane, or
- Whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these areas on that date.
The IRS announcements relaxed the requirements for documentation of plan loans and hardship withdrawals. They allow plan administrators to rely upon representations from the participant as to the need for and the amount of a hardship distribution. Other documentation must be provided as soon as practicable.
If a plan sponsor wishes to take advantage of the relaxed rules for plan loans and hardship distributions, a plan sponsor can start providing such loan distributions immediately; however, the plan documents must permit (or be amended to permit) the actions that were taken. To determine if any plan amendments are necessary, you should contact a Venable Benefits attorney.
An employer may sponsor a leave-based donation program, under which employees may forgo their vacation, sick, or personal leave in exchange for cash payments the employer makes, before January 1, 2019, to charities providing relief. In Notice 2017-52, the IRS has announced that donated leave is not included in the employee's income, and employers may deduct these cash payments to charity as a business expense.
Extension of Certain Benefits-Related Deadlines until January 31, 2018
The IRS, in releases GA-2017-02, FL-2017-04, PR-2017-02, VI-2017-02, and TX-2017-09, has extended certain benefits-related deadlines1 to January 31, 2018 for "affected taxpayers." The following are considered "affected taxpayers" and thus are eligible for deadline extensions:
- Any individual whose principal residence is located in a covered disaster area;
- Any business entity or sole proprietor whose principal place of business is located in a covered disaster area; and
- Any individual whose principal residence, or any business entity or sole proprietor whose principal place of business is not located in a covered disaster area, but whose records necessary to meet a deadline for an act specified in Treas. Reg. § 301.7508A-1(c) are maintained in a covered disaster area.
The most noteworthy benefits-related deadlines include:
- Filing Form 5500s;
- plan loan repayments;
- 83(b) elections;
- certain 72(t) relief – 10% early withdrawal tax;
- cafeteria plan elections under Code section 125;
- timing of indirect rollovers;
- required minimum distributions under Code section 401(a)(9);
- distribution of excess deferrals, and corrective distributions for excess contributions/excess aggregate contributions;
- remedial amendment period; and
- distribution of nondeductible contributions to avoid the 10 percent penalty under Code section 4972.