Plan Compliance & IRS Relief Related to Natural Disasters
During 2012, the Internal Revenue Service (“IRS”) provided such legislation (IRS Announcement 2012-44) for a need arising from Hurricane Sandy to an employee or former employee whose principal residence on October 26, 2012, was located in one of the counties identified as covered disaster areas. This legislation provides that a qualified employer plan will not be treated as failing to satisfy any requirement under the Code or regulations merely because the plan makes a loan or a hardship distribution.
For a limited time, the IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. 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 Sandy victim 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 that lived or worked in the disaster area.
Plans will also 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 limits that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter.
Hardship withdrawals under these provisions for Hurricane Sandy must occur by February 1, 2013
To qualify for the relief under this legislation the hardship withdrawal must occur before February 1, 2013. Additionally, as soon as practicable, the plan administrator (or financial institution in the case of IRAs) must make a reasonable attempt to assemble any forgone documentation.
With respect to blackout periods related to Hurricane Sandy, the DOL will not allege a violation of the blackout notice requirements solely on the basis that a fiduciary did not make the required written determination.
EXAMPLE
For example, if spousal consent is required for a plan loan or distribution and the plan terms require production of a death certificate if the employee claims his or her spouse is deceased, the plan will not be disqualified for failure to operate in accordance with its terms if it makes a loan or distribution to an individual described in the first paragraph under “Relief” in the absence of a death certificate if it is reasonable to believe, under the circumstances, that the spouse is deceased, the loan or distribution is made no later than February 1, 2013, and the plan administrator makes reasonable efforts to obtain the death certificate as soon as practicable.
Taxpayers are reminded that in general the normal spousal consent rules continue to apply. For purposes of this announcement, “retirement plan” has the same meaning as “eligible retirement plan” under §402(c)(8)(B).
Covered disaster areas are identified as federally declared disaster areas in the News Releases issued by the IRS for Victims of Hurricane Sandy, which are found on IRS.gov at:
https://www.irs.gov/uac/Newsroom/Help-for-Victims-of-Hurricane-Sandy
The Department of Labor (“DOL”) also announced relief for plans and plan sponsors affected by Hurricane Sandy to assist with clarifying possible compliance issues due to the recent IRS assistance relief, inability to deposit employee contributions timely, blackout notice violations, and group health plan participant benefit claims. The relief provided under this announcement is in addition to the Form 5500 Annual Return/Report filing relief already provided by the IRS.
Specifically, the DOL clarified that it will not treat any person as having violated the provisions of title I of ERISA solely because they complied with the provisions of IRS Announcement 2012-44 regarding certain verification procedures that may be required under retirement plans with respect to plan loans to participants and beneficiaries, hardship distributions, and other pension benefit distributions (see details above).
OTHER COMPLIANCE ISSUES
In addition, the DOL indicated it will not seek to enforce the provisions of title I with respect to a temporary delay due to Hurricane Sandy in forwarding of participant loan repayments and deferrals to the plan in the prescribed timeframes as long as the employers and service providers act reasonably, prudently, and in the interest of employees to comply as soon as practical under the circumstances. The IRS has also informed the DOL that it will not seek to assess an excise tax with respect to a prohibited transaction under section 4975 of the Code resulting solely from such a temporary delay.
The DOL also announced relief from the 30 days advance notice to participants and beneficiaries whose rights under the plan will be temporarily suspended, limited, or restricted by a blackout period. With respect to blackout periods related to Hurricane Sandy, the DOL will not allege a violation of the blackout notice requirements solely on the basis that a fiduciary did not make the required written determination.
Finally, because plan participants and beneficiaries may encounter an array of problems due to the hurricane, such as difficulties meeting certain deadlines for filing benefit claims and COBRA elections, the DOL issued a reminder that its approach to enforcement emphasizes compliance assistance and includes grace periods and other relief, where appropriate, to provide reasonable accommodations to prevent the loss of benefits due to the failure of individuals to comply with pre-established timeframes.
NEED MORE INFORMATION?
If you need more information regarding this or any other topic affecting your retirement plan, visit our Withum ERISA Knowledge Corner online, follow us on Twitter at WSB_ERISA or contact us at [email protected] to arrange a free consultation today.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.
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