Recent hurricanes and wildfires leave us wondering what relief options our retirement plans can provide for us.
Due to 2017 hurricanes (such as Harvey, Irma and Maria), the Internal Revenue Service, Labor Department and Pension Benefit Guaranty Corporation implemented changes to their typical compliance requirements to allow storm relief to both employees and employers in retirement plans. This relief has since been incorporated into the “Disaster Tax Relief and Airport and Airway Extension Act of 2017″ that was signed into law September 29, 2017 by President Donald Trump. In the wake of 2018 hurricanes Michael and Florence, the IRS issued a reminder on November 29, 2018 that these regulations provide relaxed procedural and administrative rules for retirement plan loans and hardship distributions to hurricane victims. To qualify for this relief, withdrawals must be made by March 15, 2019. So, what relief is provided?
Plans can make loans or hardship distributions before they formally amend the plan and are allowed to overlook the reasons that normally apply as well as suspend documentation that is normally required, provided that the plan makes a diligent effort to comply with required hardship documentation procedures as soon as possible. This allows a qualified disaster-area participant to take a hardship distribution to purchase necessities as a result of the storm based on the participant’s representations as to the required hardship amount, unless the plan administrator has knowledge to the contrary. In addition, the plan does not need to impose the normal post-distribution six-month contribution delay for hardship withdrawals.
This relief also allows a defined contribution plan to loan money to a qualified disaster-area participant if the plan makes a good-faith diligent effort under the circumstances to comply with required plan loan documentation procedures. It also as allows a person who lives outside the disaster area to 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.
The IRS emphasizes that the tax treatment of loans and distributions remains unchanged. A complete list of eligible localities is available on FEMA’s Disasters page.
The Bipartisan Budget Act of 2018 (“Budget Act”) includes disaster relief specifically for the California wildfires as well as new provisions for expanding plan hardship distributions. On February 9, 2018, President Trump signed this Act into law. So, what relief is provided?
While Congress provided relief for hurricanes Harvey, Irma and Maria, current law provides limited provisions for hardship and loans for victims of the California wildfires. The Budget Act now provides similar relief for victims of the 2017 California wildfires, such as relief from 10% additional tax for early withdrawals, relief from mandatory 20% withholding and allowable in-service distribution for qualified wildfire distributions. Also, an increase in loan limit from $50,000 and 50% of vested account balance to $100,000 and 100% of vested account balance through December 31, 2018, with up to a one-year delay for loan repayments. While these provisions are optional, if the plan elects, the provisions should be reflected in a plan amendment by the end of the 2019 Plan Year.
The DOL has also published relief for victims of California Camp, Hill, Woolsey and other 2018 California wildfires. This allows plans to suspend procedural requirements for plan loans and distributions and the DOL will not treat it as a failure if attributable to the 2018 California Wildfires provided the plan administrator makes a good-faith effort to comply with those requirements and makes a reasonable attempt to obtain documentation as soon as practicable. Also, the DOL will not take action against employers located in covered disaster areas that were not able to forward participant payments and withholdings to plans within the prescribed time frames, so long as the temporary delay is solely attributable to the 2018 California Wildfires and plan administrators resume remittances as soon as practicable.
In addition to disaster relief, the Budget Act revises current rules that apply to hardship distributions. The new rules eliminates the requirement that a participant must first request all available plan loans before taking a hardship withdrawal as well as eliminate the 6-month suspension period for making new contributions following a hardship distribution. They also expand the types of funds that can be distributed in the event of a hardship withdrawal to include QMACs, QNECs, 401(k) safe harbor plan contributions, and earnings. This is applicable for plan years beginning after 2018; however some distributions issued in 2018 may also be eligible for portions of these rules. These changes simplify hardship administration and give participants in need more access to their accounts. Plan sponsors and third party administrators should update their hardship procedures before the 2019 plan year as well as file any amendments.
More information about other tax relief can be found on the IRS disaster relief page.
For more information regarding this or any other topic affecting your retirement plan, visit our Withum ERISA Knowledge Corner online.