Congress Provides Additional Tax Relief for Victims of Hurricanes Harvey, Irma and Maria
On September 29, President Trump signed into law the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the “Act”). The Act provides temporary tax relief to the victims Hurricanes Harvey, Irma, and Maria (the “Hurricanes”). The Act also provides victims of the Hurricanes with additional access to their retirement accounts and lessens the tax burdens related to these distributions. Below is a summary of the relief provided by the Act.
This relief is in addition to the relief previously provided by the IRS, DOL and PBGC, as discussed in our recent client alert titled “Federal Agencies Provide Benefit Plan Relief to Victims of Hurricanes Harvey and Irma,” released earlier this month.
Relief to Participants of Eligible Retirement Plans
Qualified Hurricane Distributions
In addition to the relaxed withdrawal rules under prior IRS guidance, the Act permits individuals directly affected by the Hurricanes to take a “qualified hurricane distribution” from their retirement plan accounts. A “qualified hurricane distribution” is any distribution from an eligible retirement plan to an individual affected by the Hurricanes, as follows:
For an individual whose principal residence on August 23, 2017, is located in the Hurricane Harvey disaster area and who has sustained an economic loss by reason of Hurricane Harvey, a distribution made on or after August 23, 2017, and before January 1, 2019 (see https://www.fema.gov/disaster/4332 for the applicable Harvey disaster area);
For an individual whose principal residence on September 4, 2017, is located in the Hurricane Irma disaster area and who has sustained an economic loss by reason of Hurricane Irma, a distribution made on or after September 4, 2017, and before January 1, 2019 (for the applicable Irma disaster areas, see https://www.fema.gov/disaster/4337 for Florida, https://www.fema.gov/disaster/4338 for Georgia, https://www.fema.gov/disaster/4336 for Puerto Rico, and https://www.fema.gov/disaster/4335 for the U.S. Virgin Islands); and
For an individual whose principal residence on September 16, 2017, is located in the Hurricane Maria disaster areas and who has sustained an economic loss by reason of Hurricane Maria, a distribution made on or after September 16, 2017, and before January 1, 2019 (see https://www.fema.gov/disaster/4339 for the applicable Maria disaster area).
The total amount of qualified hurricane distributions to an individual from all eligible plans cannot exceed $100,000. When applying this limit, plan sponsors are only responsible for monitoring total distributions from plans that they (or other controlled group members) sponsor.
The following special rules apply to qualified hurricane distributions:
Exempt from the 10% excise tax that normally applies when an active participant takes money out of a plan before age 59-1/2.
Exempt from the usual 20% mandatory withholding.
The distribution can be included in taxable income ratably over the 3-taxable year period that begins with the year in which the distribution is received.
Individuals can avoid paying tax on all or a portion of a qualified hurricane distribution if they repay the same amount to the same or other eligible retirement plans (i.e., an IRA, 403(b), 457 plan, etc.) in which they participate at any time within 3 years from the date of the distributions.
Qualified Plan Loan Relief
The Act increases the maximum loan amount for “qualified hurricane distributions” (defined below) from $50,000 to $100,000, and removes the limit that would normally cap a loan at 50% of the vested account balance. This allows a participant to borrow up to the lesser of $100,000 or his or her entire vested account balance.
In addition, “qualified individuals” (defined below) with an outstanding plan loan on or after August 23, 2017 (for Harvey victims), September 4, 2017 (for Irma victims) and September 16, 2017 (for Maria victims), may delay for one year any loan repayments due after the applicable date, and before January 1, 2019. Participants taking advantage of the delay must have their loans reamortized to reflect the one-year postponement, and the one-year postponement period does not impact the term of the loan.
Re-contribution of Prior Withdrawals for Home Purchases
The Act includes a special provision that allows participants who to took a hardship distribution for the purchase or construction a home in any of the designated disaster areas to re-contribute the distribution if the Hurricanes prevented the home from being purchased or constructed. To be eligible for this relief, the withdrawal must have been received after February 28, 2017 and before September 21, 2017, and the re-contribution must be made during the period from August 23, 2017 through February 28, 2018. Re-contributed amounts are treated similar to repayments of qualified hurricane distributions discussed above.
Relaxed Qualifications for Casualty Loss Deductions
The Act has relaxed casualty loss deduction requirements. Under current law, a taxpayer may claim an itemized deduction for any loss sustained during the tax year that is not compensated by insurance, but only to the extent that is at least $100 and exceeds 10% of adjusted gross income (“AGI”). Under the Act, the requirement that personal casualty losses must exceed 10% of AGI is eliminated for individuals affected by the Hurricanes. However, the Act increases the casualty minimum deduction from $100 to $500.
Further, the Act removes the itemized requirement of the casualty loss deduction. Currently, in order to be eligible for a casualty loss deduction one must claim it as an itemized deduction on their federal income tax return. Thus, the casualty loss was unavailable to a taxpayer who did not itemize but rather opted to use the standard deduction. Under the Act, the amount of the casualty loss deduction will be allowed to be added to the standard deduction. Thus, the Act allows taxpayers to deduct casualty losses whether they itemize or take the standard deduction.
Charitable Deduction Limitations Suspended for Qualifying Hurricane Relief Contributions
Under the Act, “qualified contributions” towards hurricane relief are exempt from the limitations under Code Section 170. Currently, Section 170 limits the deduction of charitable contributions based on a percentage of the taxpayer’s AGI, depending on both the type of property contributed and the type of taxpayer. Further, any excess contribution amounts may be carried forward five years. “Qualified contributions” are cash contributions made during the period beginning on August 23, 2017, and ending on December 31, 2017, to specific, listed organizations providing relief to victims of the Hurricanes. For the contribution to be qualified contribution, the taxpayer must also make an election and provide evidence substantiating that the contribution was used for covered relief efforts.
Employment Tax Credits
The Act creates an employee retention credit for eligible employers equal to 40% of up to $6,000 of qualified wages with respect to each eligible employee for the tax year. For purposes of the Act, “eligible employers” are those that conducted an active trade or business in a declared disaster zone on the date of the disaster and, for some period of time following the disaster, were rendered inoperable.
Special Rule on “Earned Income”
The Act allows an individual whose place of abode on August 23, 2017 was located in a federally declared disaster area to substitute their previous year’s earned income for purposes of calculating the earned income tax credit and child tax credit. To be eligible for the election, the earned income of the taxpayer for the tax year in which the disaster occurred must be less than the earned income of the preceding year.
U.S. Territory Tax Relief
Individuals subject to Puerto Rico income taxation may qualify for deadline extensions and other relief from the Puerto Rico Department of Treasury, which is operating from a temporary remote location. In addition, in Notice 2017-56, the IRS relaxed the requirements to be considered a bona fide resident of Puerto Rico or the U.S. Virgin Islands (and therefore exempt from U.S. income tax), for those who temporarily left the territories due to Hurricanes Irma or Maria. Individuals who are residents of Puerto Rico or the U.S. Virgin Islands should consult U.S. territory tax advisors for guidance.
Plan sponsors interested in adopting the special distribution rules under the Act have until the end of the first plan year beginning on or after January 1, 2019 (December 31, 2019, for calendar year plans) to amend their plan documents. Plan sponsors who amend (or intend to amend) their plans to provide qualified hurricane distributions should also consider taking the following steps to insure that participants are aware of the opportunities offered by Act:
Consider notifying all participants, both active and inactive, about the availability of qualified hurricane distributions.
Supplement the plan’s Special Tax Notice to include information regarding the special tax treatment of qualified hurricane distributions.
Send participants a Summary of Material Modifications to the plan’s Summary Plan Description (“SPD”), or restate the SPD.
The IRS is likely to issue additional guidance on these topics in the coming weeks.