As the Hurricane Harvey recovery begins, some employers may be considering providing financial assistance payments to their employees who have been adversely affected by the storm. If certain requirements are satisfied, these payments can be tax-free to employees and deductible by the employer. In addition, the Internal Revenue Service has relaxed the retirement plan loan and hardship distribution rules for individuals adversely affected by Hurricane Harvey. Governmental agencies have also announced extended deadlines and other relief for retirement plan contributions, payments and filings required to be made by employers and plan administrators affected by the hurricane.
Qualified Disaster Relief Payments
Employers may provide tax-free “qualified disaster relief payments” to their employees who have been affected by Hurricane Harvey. Qualifying payments can be excluded from an employee’s gross income and are not subject to federal income tax or employment tax withholding requirements. Further, these payments are generally deductible by employers.
A “qualified disaster relief payment” eligible for tax-free treatment includes any amount 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 repair, rehabilitation, or replacement is attributable to a qualified disaster.
However, disaster relief payments can be excluded from gross income only to the extent the expense they compensate is not otherwise compensated by insurance or otherwise. Hurricane Harvey is considered a “qualified disaster” for employees who live in an area listed on the disaster declaration page of the FEMA website. Although no formal substantiation of expenses is required, employers who provide these payments may consider obtaining written confirmation from employees regarding the satisfaction of the applicable requirements.
Qualified Plan Loans and Hardship Distributions
The IRS announced on August 30, 2017 certain relief relating to loans and distributions by qualified employer plans to employees or former employees whose principal residence or place of employment (or that of the employee’s spouse, dependent, or lineal ascendant or descendant) was located in designated counties affected by Hurricane Harvey as listed on the FEMA website. Under this relief, a plan may make loans and hardship distributions even though such transactions are not currently provided for in the plan document but only if the plan could engage in such transactions if it contained enabling language and the plan is amended to provide for such transactions by the end of the first plan year beginning after December 31, 2017. The relief provided by the IRS applies to any hardship distribution (not just those specifically enumerated in regulations) resulting from Hurricane Harvey that is made through January 31, 2018, and no post-distribution contribution restrictions are required. Certain procedural requirements associated with plan loans and distributions have also been relaxed to some extent through January 31, 2018. Unless the plan administrator has actual knowledge to the contrary, it may rely upon representations from the employee as to the need and the amount of a hardship distribution.
Additional Agency Relief
The IRS has postponed until January 31, 2018 the deadlines for affected employers and plan administrators to take certain actions required on or after August 23, 2017 and before January 31, 2018. Employers and plan administrators whose principal place of business is located in, or whose records necessary to meet the deadline are maintained in, designated counties affected by Hurricane Harvey as listed on the FEMA website qualify for this relief. Actions subject to the postponement include, but are not limited to:
- Making plan contributions due September 15, 2017 for the tax year ending December 31, 2016;
- Filing Form 5500 series returns due October 16, 2017 for the plan year ending December 31, 2016;
- Making corrective distributions of actual deferral percentage (ADP) test excess contributions (elective or Roth deferrals) or actual contribution percentage (ACP) test excess aggregate contributions (after-tax and matching contributions) and applicable earnings for the plan year ending December 31, 2016; and
- Distributing required minimum distributions for the plan year ending December 31, 2017.
The Department of Labor (DOL) and Pension Benefit Guaranty Corporation (PBGC) have also announced disaster relief in response to Hurricane Harvey for affected persons. DOL relief includes that the department will forgo enforcement of certain requirements in connection with (1) temporary delays in forwarding participant contributions and loan repayments to an employee benefit plan and (2) fiduciary failures to make certain required written determinations in connection with a blackout period (i.e., a period of more than three business days during which a participant’s ability to direct investments or obtain loans or distributions from a plan is restricted). PBGC relief extends deadlines for affected employers and administrators with respect to various filings, payments, and other requirements, including PBGC premium filings and related payments.