IRS publications permit easier access to retirement funds and encourage leave-based charitable donation programs for those affected.
- IRS Announcement 2017-11 provides relief to Hurricane Harvey victims from certain limitations that would normally apply to hardship distributions and loans from tax-qualified employer retirement plans.
- IRS Notice 2017-48 encourages leave-based charitable donation programs for Hurricane Harvey victims, under which employees may be permitted to convert accrued paid leave into charitable donations. Existing guidance already permits employers to establish major disaster leave-sharing programs.
- Similar relief is likely to be extended to others impacted during the 2017 Atlantic hurricane season.
Hardship Distributions and Plan Loans
Announcement 2017-11 (Announcement) provides that a tax-qualified employer retirement plan may treat a distribution to a current or former employee covered by the Announcement as on account of hardship or an unforeseeable emergency, unless the plan sponsor has actual knowledge to the contrary. The Announcement also removes certain limitations on making post-distribution contributions, and provides that, subject to certain requirements, a retirement plan may temporarily suspend its procedural requirements for plan loans and distributions. Plans that lack the appropriate authorizing language must be amended to provide for hardship distributions or loans by no later than the end of the first plan year beginning after December 31, 2017.
The Announcement does not change the requirements for plan loans or change the rules for what funds are eligible for a hardship distribution, nor does it provide relief from any applicable spousal consent rules or the normal tax treatment of in-service distributions of pre-tax amounts. Actions taken in compliance with the provisions of the Announcement will not be treated as a violation of the applicable provisions of the Employee Retirement Income Security Act.
The relief generally applies only with respect to employer-sponsored 401(k) and 403(b) plans, and 457(b) plans maintained by state or local government instrumentalities, and only with respect to hardship distributions and loans made between August 23, 2017 and January 31, 2018.
The relief is available generally with respect to current and former employees whose principal residence or place of employment on August 23, 2017, was located in one of the Texas counties identified for assistance by FEMA, or whose lineal ascendant or descendant, dependent or spouse had a principal residence or place of employment in one of those counties on that date.
Leave-Sharing Banks and Charitable Donations
In addition to the major disaster leave-sharing plans currently permitted by Notice 2006-59, employers may now adopt leave-based donation programs, under which employees can elect to forgo vacation, sick or personal leave in exchange for cash payments that the employer makes to charitable organizations described in Section 170(c) of the Code (170(c) organizations).
Under Notice 2017-48, cash payments an employer makes to 170(c) organizations in exchange for leave that its employees elect to forgo will not be treated as gross income or wages of the donating employees if the payments are made to the 170(c) organizations for the relief of victims of Hurricane Harvey and Tropical Storm Harvey and prior to January 1, 2019. Similarly, the donating employees will not be treated as being in constructive receipt of gross income or wages and no reporting of the donated leave is required in Box 1, 3 or 5 of Form W-2.
Electing donating employees may not claim a charitable contribution deduction with respect to the forgone leave excluded from compensation and wages, and the payments to the charity are not exclusively deductible under Section 170 of the Code (rather than Section 162 of the Code).
Other Related Relief
The Internal Revenue Service, Department of Labor and Pension Benefit Guaranty Corporation (PBGC) also relaxed certain rules and filing deadlines for employers generally located in a listed disaster area. Additional information can be found on the IRS, DOL and PBGC websites.
We expect that those agencies will extend the same relief to victims of Hurricane Irma.
- Plan sponsors of tax-qualified employer plans seeking to take advantage of the IRS relief to offer loans or hardship distributions to covered current or former employees should review the relevant plan documentation to determine whether loans or hardship distributions are permitted or whether any amendments need to be made.
- Such Plan sponsors should also work with their benefits providers to ensure that adequate systems are in place for the streamlined loan and hardship distribution process, and that any follow-up procedures needed to comply with plan procedural requirements or assemble foregone documentation are established.
- Employers seeking to adopt a major disaster leave-sharing plan under Notice 2006-59 should familiarize themselves with the requirements for doing so, and should consider whether the deposited leave will be converted on a dollars basis or hours basis and the method in which available leave dollars or hours will be allocated among those in need.
- Employers seeking to adopt a leave-based donation program under Notice 2017-48 should ensure that the charitable organizations designated as the recipients of the leave donations are of the type described in Section 170(c) of the Code, and that the donations are being used for the relief of victims of Hurricane Harvey and Tropical Storm Harvey.