IRS Lets Retirement Plans Make Loans, Distributions to Victims of Hurricane Harvey

Tax payment and disclosure extensions also granted by IRS; Labor Department issues ERISA relief

Stephen Miller, CEBS By Stephen Miller, CEBS August 31, 2017
IRS Lets Retirement Plans Make Loans, Distributions to Victims of Hurricane Harvey
Update: The Disaster Tax Relief and Airport and Airway Extension Act of 2017, signed by President Trump on Sept. 29, includes relief from the 10 percent premature distribution penalty for withdrawals from retirement savings and provides expanded loan availability to qualified plan participants. It also offers withholding exceptions, delayed taxation and extended repayment options to ease the financial bite of tapping retirement savings for hurricane recovery. This relief is in addition to recent IRS, PBGC and DOL guidance that extended deadlines and relaxed documentation requirements, reports Conduent, an HR consultancy.

The Internal Revenue Service (IRS) announced on Aug. 30 that 401(k)s and similar employer-sponsored retirement plans can expedite loans and hardship distributions to victims of Hurricane Harvey and members of their families. Affected businesses also received more time to pay quarterly taxes and submit regulatory filings.

As described in Announcement 2017-11, participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) plans, and state and local government employees with 457(b) plans may be eligible to take advantage of streamlined loan procedures and liberalized hardship distribution rules through Jan. 31, 2018.

[SHRM members-only platform: Disaster Prep & Recovery on SHRM Connect]

Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster areas designated by the Federal Emergency Management Agency (FEMA), which at press time included 33 Texas counties.

"The IRS will continue to closely monitor the storm's aftermath, and we anticipate providing additional relief for other affected areas in the near future," said IRS Commissioner John Koskinen in a released statement.

The relief is similar to relief provided last year to Louisiana flood victims and to those affected by Hurricane Matthew.

Streamlined Procedures

Eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape, the IRS said. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

"This broad-based relief means that a retirement plan can allow a victim of Hurricane Harvey to take a hardship distribution or borrow up to the specified statutory limits from the victim's retirement plan," the IRS said. "It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area."

Plans will be allowed to:

  • Make loans or hardship distributions before the plan is formally amended to provide for such features.
  • Ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter.
  • Relax plan requirements that certain documentation must be submitted by participants before a distribution is made.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10 percent early-withdrawal tax.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Filing Relief

Hurricane Harvey victims in parts of Texas have until Jan. 31, 2018, to file certain individual and business tax returns and to make certain tax payments and regulatory disclosure filings, the IRS  also announced (and updated here). This includes providing retirement plan sponsors a further extension for those who had already received an extension to file the Form 5500 by Oct. 16. (For calendar-year benefit plans, Form 5500 is due July 31 with an extension available this year to Oct. 16.)

"Like past hurricanes, Harvey struck at a particularly busy time for plan sponsors and their service providers," said Brian Graff, executive director and CEO of the American Retirement Association in Arlington, Va., which represents service providers and plan sponsors. "This is due to the pending deadline for calendar year plans that received an extension to file Form 5500 until Oct. 16."

He noted the additional extension was particularly important to plan sponsors with books, records or a Form 5500 return preparer located in areas affected by the storm.

IRS Permits Employees to Donate Paid Leave

"In Notice 2017-48, the IRS allows employees to elect to forgo vacation, sick or personal leave and have their employer make a cash donation to the ongoing Hurricane Harvey relief efforts, without having to include the value of the paid leave in the employees' taxable income," noted Ethan McWilliams, senior compliance analyst at Lockton Benefit Group in Omaha, in an online alert. The IRS previously granted similar relief in the wake of other natural disasters, such as Hurricane Katrina, he pointed out.

To avoid tax consequences to the donating employees, the employer's donations must fulfill the following, McWilliams explained:

  • Go to one or more charitable organizations described in Tax Code section 170(c).
  • Go specifically toward the relief of the victims of Hurricane Harvey.
  • Be made before Jan. 1, 2019.

Employers making such donations may deduct the value of the contributions as ordinary business expenses, McWilliams said. The employer should not include these cash payments in Box 1, 3 or 5 of the applicable employee's Form W-2. The employees may not claim the value of their donated paid leave as a deductible charitable contribution on their personal tax return filings.

"This last restriction is logical because the employee never takes the value of the contribution into account as taxable income in the first instance," McWilliams noted.

Disaster Assistance Leave Banks—Employees Donate Leave to Impacted Workers

An employee leave bank is a method to donate leave to affected co-workers, explains an Aug. 31 LawFlash post by law firm Morgan Lewis. "Employees can deposit unused leave into the leave bank, which can be used by co-workers who have exhausted or will exhaust their paid leave to address an illness, family crisis, or a disaster such as Hurricane Harvey."

The additional leave taken by the affected employees would be taxed as compensation, "but the co-worker donating the leave would not be taxed," the post explains.

Other employer-sponsored relief programs are also discussed in the post.

Tax Matters

"The Hurricane Harvey tax relief postpones various business tax filing and payment deadlines that occurred starting on Aug. 23, when Harvey made landfall on the Texas Gulf Coast," noted Kay Bell, who writes about financial matters on her blog Don't Mess with Taxes. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period.

For businesses, tax extensions granted by the IRS include:

  • The Sept. 15, 2017, and Jan. 16, 2018, deadlines for making quarterly estimated tax payments.
  • The Oct. 31 deadline for quarterly payroll and excise tax returns.
  • Late-deposit penalties for federal payroll and excise tax deposits normally due on or after Aug. 23 and before Sept. 7, if the deposits are made by Sept. 7, 2017.

For individual tax filers, relief includes payment of 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017.

"Almost as good as the tax relief itself is that the IRS is making it easy for eligible filers to receive it," Bell noted. "The IRS automatically provides filing and penalty relief to any taxpayer whose address of record with the tax agency is in the disaster area. That means affected taxpayers don't need to contact the IRS to get this relief."

However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended due date within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

More information about tax and other relief related to Hurricane Harvey can be found on the IRS disaster relief page. 

DOL Grants ERISA Relief

The U.S. Department of Labor (DOL) also announced employee benefit plan compliance relief for those affected Hurricane Harvey. The DOL recognized that plan sponsors, service providers and participants may encounter issues complying with the Employee Retirement Income Security Act (ERISA) in disaster areas, especially as caused by disruptions in banking and payroll processing.

This relief is in addition to Form 5500 Annual Return/Report filing relief provided by the IRS, as noted above, and includes:

• Verification procedures for plan loans and distributions. The DOL is working with the IRS to provide relief regarding verification procedures required for retirement plans with respect to plan loans to participants and beneficiaries, hardship distributions and other pension benefit distributions. Additional information will be made available on the DOL's disaster relief website.

• Participant contributions and loan repayments. The DOL recognizes that some employers and service providers, such as payroll processing services, located in disaster areas will not be able to forward participant payments and withholdings to employee retirement plans within the prescribed timeframe. In such instances, the DOL will not—solely on the basis of a failure attributable to Hurricane Harvey—seek to enforce compliance provisions with respect to a temporary delay in the forwarding of payments or contributions to an employee retirement plan "to the extent that affected employers, and service providers, act reasonably, prudently and in the interest of employees to comply as soon as practical under the circumstances."

• Blackout notices. In general, ERISA requires retirement plan administrators to provide 30 days advance notice to participants and beneficiaries whose rights under the plan will be temporarily suspended, limited or restricted by a blackout period (i.e., a suspension of more than three consecutive business days on a participant's ability to direct investments, obtain loans or obtain other distributions from the plan). The regulations provide an exception to the advance-notice requirement when the inability to provide the notice is due to events beyond the reasonable control of the plan administrator, and a fiduciary so determines in writing. 

"Natural disasters, by definition, are beyond the control of a plan administrator," the DOL noted. "With respect to blackout periods related to Hurricane Harvey, the department will not allege a violation of the blackout notice requirements solely on the basis that a fiduciary did not make the required written determination."

• ERISA group health plan compliance guidance. When health plan participants and beneficiaries encounter problems due to the hurricane, such as difficulties meeting deadlines for filing benefit claims and COBRA elections, "the guiding principle for plans must be to act reasonably, prudently and in the interest of the workers and their families who rely on their health plans for their physical and economic well-being," the DOL said. "Plan fiduciaries should make reasonable accommodations to prevent the loss of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established timeframes."

When full and timely compliance by group health plans may not be possible, "our approach to enforcement will be marked by an emphasis on compliance assistance and include grace periods and other relief where appropriate, including when physical disruption to a plan or service provider's principal place of business makes compliance with pre-established timeframes for certain claims' decisions or disclosures impossible," the DOL said.

For more information, see the DOL's FAQs for Participants and Beneficiaries Following Hurricane Harvey.

Related SHRM Articles:

Aencies Give Tax Filing and 401(k) Withdrawal Relief to Hurricane Irma Victims, SHRM Online Benefits, September 2017

Hurricane-Related Donations: Ways for Employers and Employees to Help, SHRM Online Benefits, September 2017

Florida Employers: Wage and Hour Considerations and Hurricane Irma, SHRM Online Benefits, September 2017

Hurricane Harvey and the FMLA: Are Your Employees Eligible for Leave During a Natural Disaster?, SHRM Online Benefits, August 2017

Houston Employers: Wage and Hour Guidance and Hurricane Harvey, The SHRM Blog, August 2017

HR Pros Weather the Storm, SHRM Online Employee Relations, August 2017

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