Firm Thought Leadership

The Internal Revenue Service (IRS) recently provided important relief for employee benefit plans and participants affected by Hurricane Harvey, including:

  • Permitting hardship distributions for any hardship arising from Harvey, regardless of whether the hardship meets the definition of an “unforeseeable emergency” under the tax rules;
  • Permitting hardship distributions for participants when certain of their family members have experienced a Harvey-related hardship;
  • Waiving the requirement that participants be barred from making plan contributions for 6 months after taking a Harvey-related hardship distribution;
  • Under certain circumstances, permitting plan loan and hardship distributions to be made to affected participants before the plan administrator assembles all of the required documentation;
  • Enabling plans to provide hardship distributions and plan loans before the plan document includes a hardship distribution or plan loan provision, so long as the provision is added to the plan at a later time (generally by December 31, 2018); and
  • Extending the Form 5500 filing deadline for certain employee benefit plans affected by Harvey.

Hardship Distribution and Plan Loan Relief

The IRS has provided retirement plan-related relief for persons affected by Hurricane Harvey. Under this relief, and for a limited time that ends on January 31, 2018, 401(k) plans (and similar plans and accounts) can quickly provide hardship distributions and plan loans to participants affected by Harvey. In short, the red tape that normally applies in hardship distribution or plan loan settings will be waived or may be dealt with at a later time for affected participants.

For instance, any hardship arising from Hurricane Harvey will automatically meet the definition of an “unforeseeable emergency” under the tax laws. As a result, a plan administrator’s receipt of detailed written descriptions of the affected participant’s hardship will not be a necessary precondition to providing the hardship distribution. Instead, plan administrators can rely a participant’s representations regarding the need for, and the amount of, the hardship distribution, unless the administrator has actual knowledge to the contrary.

Moreover, hardship distributions are not just limited to participants living or working in areas impacted by Hurricane Harvey (the IRS is relying on FEMA’s listing of counties - available at FEMA.gov/disasters impacted by Harvey for these purposes). Participants also may requests hardship distributions when the money is needed to assist their close family members (e.g., spouse, children, grandchildren, parents, grandparents and other dependents) who live or work in areas impacted by Harvey. After these hardship distributions have been made, participants may continue making contributions to the plan and will not be subject to the 6-month prohibition on plan contributions that normally applies.

Similarly, plan loans can be provided even when a plan administrator has not assembled all of the documentation required for the loan, so long as the administrator acted diligently and in good-faith under the circumstances and makes reasonable efforts to assemble the missing documentation after the loan is made. For instance, for plan loans that require spousal consent and production of a death certificate if the spouse is deceased, production of a death certificate will not be required if there is reason to believe under the circumstances that the spouse is, in fact, deceased.

A plan may begin providing hardship distributions and plan loans now, even if the plan document does not include a hardship distribution or loan provision, so long as the plan is amended at a later time, generally, before January 1, 2019, to allow for plan loans and/or hardship distributions.

This relief extends to 401(k), 403(b) and 457(b) plans, IRAs, and even in some cases qualified defined benefit pension plans that include stand-alone account features that hold employee contributions and rollover amounts. Nothing in this relief changes the regular tax treatment that normally applies upon receipt of a hardship distribution or the default on a plan loan. As a result, the general rules that impose income taxes and a 10% penalty tax on hardship distributions and plan loan defaults will continue to apply under this relief.

Form 5500 Relief

The IRS also issued Form 5500 relief for plan sponsors based in areas impacted by Hurricane Harvey. Under this relief, the deadline for filing the Form 5500 has been extended until January 31, 2018. This relief only applies to the extent the Form 5500’s original due date (or original due date with extensions) occurs between August 23, 2017 and January 31, 2018.