In Hurricane Matthew’s Wake, 401(k) Withdrawals and ERISA Deadlines Eased

IRS and DOL relief is similar to waivers following other natural disasters

Stephen Miller, CEBS By Stephen Miller, CEBS November 4, 2016

Employees hit hard by Hurricane Matthew will find it easier to use their 401(k) or similar plans for emergency relief, and affected employers have some leeway in meeting benefit plan filing deadlines under the Employee Retirement Income Security Act (ERISA).

Retirement Plans Can Expedite Funds

In Announcement 2016-39, issued on Oct. 21, the IRS streamlined the procedures for 401(k)s and similar employer-sponsored retirement plans to make loans and hardship distributions to victims of Hurricane Matthew and members of their families. This is similar to relief provided this summer to Louisiana flood victims.

The IRS said that participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans, may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules.

As a result, "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.

Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster area localities affected by Hurricane Matthew and designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, parts of North Carolina, South Carolina, Georgia and Florida qualify for individual assistance (a list of eligible counties is posted on the FEMA website). To qualify for this relief, hardship withdrawals must be made by March 15, 2017.

This broad-based relief means that a retirement plan can allow a victim of Hurricane Matthew to take a hardship distribution or borrow up to the specified statutory limits from the victim's retirement plan. 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.

[SHRM members-only policy: Disaster Preparedness: Emergency Evacuation Program Policy]

A Sped-Up Process

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

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.

Though individual retirement account participants are barred from taking loans from their IRAs, they may be eligible to receive distributions under liberalized procedures, the IRS said. More information about other relief related to Hurricane Matthew can be found on the IRS disaster relief page.

Tax Filing and Benefit Plan Relief

The IRS also provided relief to employers adversely affected by Hurricane Matthew, including postponements of various tax filing and payment deadlines and Form 5500 Annual return/report filing relief for affected employers in parts of Florida, Georgia, North Carolina, South Carolina and Virginia.

Separately, the Department of Labor (DOL) announced relief from compliance with employee benefit plan rules for affected employers.

"The department understands that plan fiduciaries, employers, labor organizations, service providers, and participants and beneficiaries may encounter compliance-related issues over the next few months in connection with employee benefit plans covered by [ERISA] as the implications of this hurricane unfold," Assistant Secretary of Labor Phyllis Borzi said in a news release.

The DOL recognized that some employers and service providers were unable to forward participant payments and withholdings to employee retirement plans within required timeframes and that "in such instances, the department will not—solely on the basis of a failure attributable to Hurricane Matthew"—seek to enforce penalties "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."

Health Plan Compliance

The DOL further recognized that plan participants and beneficiaries may have encountered an array of problems due to the hurricane, such as difficulties meeting certain deadlines for filing health benefit claims and COBRA elections. "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," the DOL said.

Furthermore, when full and timely compliance by group health plans and issuers may not have been possible, the DOL noted that "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."

Related SHRM article:

Hurricane Matthew and Crisis Management: An Employer’s Checklist, SHRM Online Benefits, October 2016

401(k) Withdrawals Eased for Louisiana Flood Victims; ERISA Deadlines Eased for Affected Employers, SHRM Online Benefits, September 2016

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

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