The Internal Revenue Service (IRS) has provided welcome relief to individuals affected by Hurricanes Harvey and Irma. The relief permits plan sponsors to temporarily relax restrictions on hardship withdrawals, participant loans and other withdrawals from certain retirement plans. This will allow victims of Hurricanes Harvey and Irma quicker access to funds in their retirement accounts to assist with storm recovery. The IRS has also issued guidance that allows employees to relinquish vacation, sick or personal leave in exchange for cash payments by their employer to charitable organizations providing relief for victims of Hurricanes Harvey and Irma.
In addition, the Department of Labor (DOL) has issued guidance that may be helpful to employees, plan sponsors and others with responsibility for administering retirement and other plans.
IRS Announcements 2017-11 and 2017-13 provide relief to sponsors of "qualified employer plans" (which includes Section 401(k) plans, Section 403(b) plans and Section 457(b) plans of states or political subdivisions) with respect to hardship withdrawals and loans to employees or former employees who were impacted, or whose families were impacted, by the recent hurricanes.
Eligibility for IRS relief
The IRS guidance relaxes restrictions on hardship withdrawals and loans granted to employees or former employees whose principal place of residence or place of employment on the eligibility date—August 23 in the case of Hurricane Harvey, September 4 in the case of Irma—was in one of the Texas or Florida counties identified by the Federal Emergency Management Agency (FEMA) for assistance. The relief extends to employees and former employees whose lineal ascendant or descendent, dependent or spouse had a principal residence or place of employment in one of the counties on the relevant eligibility date. The list of eligible counties is available on FEMA's website.
Hardship withdrawal relief
The following relief applies to hardship withdrawals made to eligible individuals on or after the applicable eligibility date, and not later than January 31, 2018:
- Qualified employer plans that do not currently permit hardship withdrawals may allow withdrawals under the relief. Note, however, that defined benefit and money purchase pension plans may not permit such withdrawals other than from a separate account, if any, containing employee contributions or rollover amounts.
- Plan administrators can rely on representations of the employee or former employee regarding the need for and the amount of the hardship, unless the plan administrator has actual knowledge to the contrary.
- Withdrawals are not limited to the usual "safe harbor" events listed in the regulations (i.e., medical expenses, purchase of a principal residence, tuition, prevention of eviction, burial or funeral expenses, repair of home). Thus, for instance, funds may be used for food and shelter, or to replace a damaged vehicle.
- Salary deferrals of the employee are not required to be suspended for six months after a withdrawal.
A plan, including one that does not currently permit loans or in-service distributions, will not be treated as failing to follow procedural requirements imposed by the plan merely because the plan administrator disregards such requirements with respect to loans (other than normal loan requirements, such as amount limitations) and distributions made to affected individuals on or after the applicable eligibility date, and not later than January 31, 2018, so long as the plan administrator makes good-faith, diligent efforts under the circumstances to comply with those requirements. In addition, the plan administrator must, as soon as practicable, make reasonable attempts to assemble any missing or omitted documentation.
The IRS provided this example: If spousal consent is required for a plan loan or distribution unless a death certificate of the spouse is provided, the plan will not be disqualified for failing to operate in according with its terms if it makes a loan or distribution to an affected individual in the absence of a death certificate, if it is reasonable to believe that the spouse is deceased and the loan or distribution is made no later than January 31, 2018. As noted, the plan administrator must make reasonable efforts, as soon as practicable, to obtain the death certificate.
Leave-based donation payments
The IRS also announced in Notice 2017-52 that an employee who agrees to forgo vacation, sick or personal leave in exchange for his or her employer making a cash payment to a charitable organization supporting hurricane relief will not be taxed on such contribution, and the contribution is not required to be reported on the employee's Form W-2, as long as the contribution is made before January 1, 2019. The IRS confirmed that employees will not be considered to be in constructive receipt of such amounts by virtue of the right to make such an election. Employees may not claim a charitable deduction with respect to such amounts. (Note that this concept is different than a leave-sharing program pursuant to which employees may donate paid time off to colleagues who may be adversely impacted by the disasters.)
The DOL also issued guidance with respect to certain plan administration difficulties arising out of Hurricane Harvey. Specifically, the DOL has indicated:
- It will not, solely on the basis of a failure attributable to Harvey, seek to enforce the normal timing requirements for deposits of salary deferral contributions into a plan's trust with respect to a temporary delay in forwarding such contributions, provided the employer and service provider act reasonably and prudently, and in the best interests of employees, to comply as soon as practicable.
- Recognizing that participants and beneficiaries may encounter difficulties meeting deadlines for filing benefit claims and COBRA elections, the DOL directs plan fiduciaries to make reasonable accommodations to prevent the loss of benefits and to minimize the possibility of individuals losing benefits because of a failure to comply with applicable deadlines.
- Noting that full and timely compliance by plans and insurance issuers may not be possible, the DOL's approach to enforcement will emphasize compliance assistance and will include grace periods and other relief where appropriate, including when physical disruption to a plan or provider's place of business makes timely compliance impossible.
It is anticipated that the DOL will issue similar guidance with respect to those affected by Hurricane Irma.
- Use of the IRS guidance is optional. Plan sponsors, particularly those with substantial employee populations affected by the hurricanes, will need to quickly decide whether to offer some or all of such relief.
- Sponsors should contact their plan record-keepers to discuss administrative procedures for making relief available.
- Sponsors wishing to make such relief available should consider distributing an appropriate communication to make affected individuals aware of relief available to them.
- To the extent a plan sponsor offers relief, its retirement plan must be amended to reflect the relief offered no later than the last day of the plan year beginning after December 31, 2017.
- Sponsors should discuss with their service providers any procedures to be implemented pursuant to DOL relief guidelines, such as the handling of late COBRA or other notice or election forms by participants.
- Sponsors should identify any compliance failures as soon as possible so that immediate and reasonable corrective measures can be taken.