401(k) Withdrawals Eased for Louisiana Flood Victims; ERISA Deadlines Eased for Affected Employers

Similar waivers were afforded those impacted by Hurricanes Katrina and Sandy

Stephen Miller, CEBS By Stephen Miller, CEBS September 12, 2016

Employer-sponsored retirement plans can allow otherwise prohibited loans and hardship distributions to aid Louisiana flood victims and members of their families, the IRS announced on Aug. 30.

Participants in private-sector 401(k) plans, employees of tax-exempt organizations with 403(b) plans and government employees with 457(b) plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules, the IRS detailed in Announcement 2016-30.

To qualify for this relief, hardship withdrawals must be made by Jan. 17, 2017. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans. As a result, eligible retirement plan participants will be able to access their money more quickly, with a minimum of red tape.

"This is a basic relief tool that is immediately needed during the recovery from the recent flooding in Louisiana," said Sen. Bill Cassidy, R-La., in a released statement. In a letter to IRS Commissioner John Koskinen last week, Cassidy had noted that similar regulatory waivers were afforded individuals affected by Hurricanes Katrina and Sandy.

According to the IRS announcement:

  • Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features.

  • The plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter.

  • If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in the announcement.

"This broad-based relief means that a retirement plan can allow a Louisiana flood victim to take a hardship distribution or borrow up to the specified statutory limits from the victim's retirement plan," according to the IRS. "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."

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. Also, a 10 percent early-withdrawal tax usually applies.

However, no congressional proposals have been introduced to date to exempt distributions for those affected by the Louisiana storms from the 10 percent premature distribution penalty or to increase the maximum loan limit.

Other Employer Steps

"Plan sponsors can use the relaxed distribution rules announced by the IRS to offer some immediate relief to affected employees," according to an alert from Xerox HR Services. The consultancy also advises employers with workers in any disaster area to consider taking additional actions, including:

  • Make qualified disaster relief payments to employees. Qualified disaster relief payments made by an employer to employees affected by the disaster are not included in the employees' income. Qualified disaster relief payments include amounts necessary to cover the following types of expenses, to the extent not covered by insurance: necessary personal, family, living, or funeral expenses and expenses for repairing or rehabilitating personal residences or repairing or replacing their contents.

  • Offer leave-sharing plans. Employees may be permitted to contribute vacation, sick, or personal leave to an employer-sponsored leave bank for use by other employees who are absent from work as a result of a federally declared major disaster. If the conditions set out in IRS Notice 2006-59 are satisfied, the value of the donated leave will be included in the leave recipient’s income and not in the income of the leave donor.

  • Extend the time limits for employee notices or payments. Employees whose lives have been disrupted may be unable to provide timely notice of change-in-status or COBRA qualifying events or to make timely COBRA elections. They may also have missed COBRA premium payment deadlines. Employers may want to provide these employees with a limited grace period for completing these actions so that they are not adversely affected.

  • Remind employees of Family and Medical Leave Act (FMLA) options. Employees are entitled to leave under the FMLA for a serious health condition caused by the disaster. Employees who must care for a child, spouse, or parent with a serious health condition may also be entitled to leave because of the flooding. For example, an employee might need to care for a family member who requires refrigerated medicine or medical equipment that is inoperable because of a power outage.

  • Remind employees about employee assistance programs. Employee assistance programs can provide employees with important information about available resources. They can also provide employees and their family members with counseling, if necessary. 
Relief from ERISA Deadlines

Separately, on Sept. 12 the Department of Labor (DOL) announced relief from certain deadlines under the Employee Retirement Income Security Act (ERISA) for employers affected by the 2016 Louisiana floods—making allowances for delays in processing participant retirement plan contributions, loan repayments, health plan benefit claims and COBRA elections.

“Although selective requirements seem to have been singled out in the DOL’s release, as a practical matter, it suggests that a reasonable approach to compliance and enforcement of other ERISA notice and timing requirements may be expected as well,” an alert from Xerox HR Services noted.

Related SHRM Article:

When Disasters Strike: Pay, Leave and Related Issues, SHRM Online Compensation, September 2011


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