The Disaster Tax Relief and Airport and Airway Extension Act of 2017 and Agency Relief for Employee Benefit Plans Impacted by Hurricanes Harvey, Irma and Maria
On September 29, 2017, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Disaster Relief Act), which provides relief for employee benefit plan participants who are victims of Hurricanes Harvey, Irma and Maria (Hurricanes).
The following is a summary of the relief granted by the Disaster Relief Act and the agencies (capitalized terms are defined at the end of this alert):
Defined Contribution Retirement Plan Relief
Qualified Hurricane Distributions - An Eligible Retirement Plan is permitted to make a distribution that meets the following requirements (Qualified Hurricane Distributions):
The distribution is made during the period beginning on the applicable Designated Disaster Date and ending on January 1, 2019, to a Qualified Individual.
The amount of the distribution, when combined with such distributions from all Eligible Retirement Plans of the employer, is not in excess of $100,000 (reduced by any qualified hurricane distributions received by the individual in all prior taxable years).
The following relief applies to Qualified Hurricane Distributions:
The early withdrawal penalty described in section 72(t) of the Internal Revenue Code (generally imposed on distributions to a participant who has not reached age 59½) will not apply.
At any time within the three-year period beginning on the date the distribution is received, the participant may make one or more contributions totaling the amount of the distribution to an Eligible Retirement Plan to which rollover contributions of such distribution could be made. Note that the law does not require the repayments to be made to the distributing plan.
For federal income tax purposes, the amount of the distribution should be included in the participant’s gross income ratably over the three-tax year period beginning with the year in which the distribution is received. The participant may elect to include the entire distribution in gross income in the year received.
Participants cannot obtain favorable tax treatment on the distribution of a Qualified Hurricane Distribution by rolling it over to a qualified retirement plan or an IRA. Any repayments of Qualified Hurricane Distributions should be treated as after-tax rollover contributions.
The Disaster Relief Act provides that retirement plans should treat any repayments of Qualified Hurricane Distributions and hardship distributions as a rollover contribution. Given that the distribution will have been subject to tax, repayments should be treated as after-tax rollover contributions.
Hardship Distributions and Loans - Pursuant to IRS guidance, a Qualified Employer Plan may make hardship distributions for a need arising from the Hurricanes to an Impacted Participant and to a participant with Impacted Family. To qualify for this relief, a hardship distribution must be made on or after the applicable Designated Disaster Date and no later than January 31, 2018. The “immediate need” for which a hardship distribution may be granted is not restricted to those listed in the regulations and may include expenses for food or shelter, or for repair or replacement of a home. Plans also need not impose the six-month contribution suspension that would typically apply in the event of a hardship withdrawal.
Note the difference between Qualified Individuals to whom Qualified Hurricane Distributions and other Disaster Relief Act relief may be made and the individuals for whom the more limited IRS relief for hardship distributions and loans can be made. The IRS relief applies to Impacted Participants, which includes Qualified Individuals and participants whose place of employment was located in a Disaster Area on the Designated Disaster Date and a participant with Impacted Family.
Pursuant to the Disaster Relief Act, a participant who received a hardship distribution after February 28, 2017, and before September 21, 2017, which was for the purpose of, but unable to be used for, the purchase or construction of a principal residence in a Disaster Area may make one or more contributions (totaling the amount of the distribution) to an Eligible Retirement Plan to which rollover contributions of such distribution could be made. The repayment must be made during the period beginning August 23, 2017, and ending February 28, 2018.
Loans made to Qualified Individuals during the period beginning on September 28, 2017, and ending on December 31, 2018, may be made in an amount equal to the lesser of $100,000 or the participant’s vested accrued benefit in the plan. Loans made pursuant to IRS relief to Impacted Participants (other than Qualified Individuals) and participants with Impacted Family must meet the statutory maximum loan amount (the lesser of $50,000 or 50 percent of the participant’s vested accrued benefit in the plan).
The repayment of an outstanding plan loan of a Qualified Individual that is due during the period beginning on the Designated Disaster Date and ending on December 31, 2018, is delayed for one year. The remaining payments should be appropriately adjusted to reflect the delay and any interest accruing during the delay. The delay is disregarded in determining the term of the loan (for purposes of determining the statutory maximum loan term). No delay is permitted for outstanding loans of Impacted Participants (other than Qualified Individuals).
With respect to IRS relief, a plan will not be treated as failing to follow procedural requirements imposed by the terms of the plan merely because those requirements are disregarded for plan distributions and loans made pursuant to the granted relief, so long as the plan administrator makes a good-faith effort to comply and, as soon as practicable, makes a reasonable attempt to assemble any necessary documentation.
Plan Amendments – Amendments needed to provide for Qualified Hurricane Distributions or other relief provided under the Disaster Relief Act must be adopted on or before the last day of the plan year beginning on or after January 1, 2019 (for governmental plans, January 1, 2021). To take advantage of the IRS relief provided, a plan that does not currently permit hardship distributions or loans must be amended by the end of the plan year beginning after December 31, 2017.
Defined Benefit Retirement Plan Relief
IRS Relief from Certain Funding Related Deadlines - The deadline for affected single employer and multiemployer defined benefit plans to make certain required minimum funding contributions with an original due date between the Designated Disaster Date and January 31, 2018, has been extended to January 31, 2018. A plan is an “affected plan” if any of the following were located in FEMA disaster area related to the Hurricanes: the employer’s principal place of business, the relevant office of the plan, or the plan’s administrator, primary record-keeper or enrolled actuary or certain other advisors.
Relief from Certain DOL Enforcement Actions and PBGC Deadlines - The DOL will not enforce penalties for failure to timely forward participant contributions and loan repayments to an employee benefit plan due to Hurricanes Harvey and Irma provided that the employer and the plan’s service providers act reasonably, prudently and in the interest of employees to comply as soon as practical. Additionally, the DOL will not allege a violation of the blackout notice requirements if the notices were not provided timely solely due to Hurricanes Harvey and Irma. (Relief with respect to Hurricane Maria may follow.)
The PBGC is waiving late premium payment penalties for premiums with due dates on or after the Disaster Date and extending certain deadlines regarding, for example, termination notices, reportable event notices and multiemployer plan filings.
Group Health Plan Relief
The DOL encourages employers to make reasonable accommodations to prevent the loss of health plan benefits due to a failure to meet plan deadlines because of Hurricanes Harvey and Irma. The DOL’s approach to enforcement will include an emphasis on compliance assistance, grace periods and other relief, where appropriate, when compliance with deadlines for claims decisions or disclosures is impossible due to Hurricanes Harvey and Irma.
IRS Extension of Form 5500 Deadline
The IRS has extended the deadline to January 31, 2018, for filing a Form 5500 with a due date on or after August 23, 2017, and before January 31, 2018, for an employee benefit plan of a plan sponsor with a principal place of business in a Disaster Area.
Designated Disaster Date means August 23, 2017, for Hurricane Harvey, September 4, 2017, for Hurricane Irma, and September 16, 2017, for Hurricane Maria.
Disaster Area means the area in Texas, Florida, Georgia, Puerto Rico or the U.S. Virgin Islands that is entitled to federal assistance as listed at FEMA.gov.
Eligible Retirement Plan means a plan described in Internal Revenue Code section 402(c)(8)(B) (such as a 401(k) plan, a 403(b) plan or a governmental 457(b) plan).
Impacted Participant means a participant whose principal residence or place of employment was located in a Disaster Area on the applicable Designated Disaster Date.
Impacted Family means a participant’s spouse, child, grandchild, parent, grandparent or dependent had a principal residence or place of employment in a Disaster Area on the applicable Designated Disaster Date.
Qualified Individual means an individual whose principal place of abode was in a Disaster Area on the applicable Designated Disaster Date, and who sustained an economic loss because of the applicable Hurricane.
Qualified Employer Plan means a qualified retirement plan that meets the requirements of sections 401(a), 403(a) or 403(b) of the Internal Revenue Code (such as a 401(k) plan, a 403(b) plan or a governmental 457(b) plan).