by Eric Ernest
The Internal Revenue Service (IRS) announced significant relief for the victims of Hurricane Harvey, which includes an extension for filing of Form 5500 series returns applicable to employee benefit plan reporting and compliance. Such returns that were required to be filed between August 23, 2017, and before January 31, 2018 , are automatically extended to Jan. 31, 2018.
In addition to extending the filing of Form 5500, the IRS announced it would provide retirement plan loan and hardship distribution relief for those impacted by Hurricane Harvey. The IRS typically charges a 10 percent tax on early distributions from retirement accounts, such as 401(k) plans, unless the taxpayer qualifies for an exception to the tax. According to the IRS, many Texas residents hit by Hurricane Harvey may need to withdraw money or borrow from their retirement plan to pay for urgent expenses; therefore, a loan from a retirement plan won’t be taxed if the loan meets the rules and the money is paid back according to the repayment schedule.
The Department of Labor (DOL) has also issued an update for impacted employers facing issues or disruptions in banking and payroll processing. In such instances, the DOL will not seek to enforce the provisions of Title I with respect to a temporary delay in the forwarding of such payments or contributions.
The Pension Benefit Guaranty Corporation (PBGC) has also provided relief for those impacted by Hurricane Harvey, in line with the January 31, 2018 filing extension announced by the IRS. The PBGC relief and extensions cover premium payments, reportable event notices and annual employer reporting that were due between August 23, 2017 and January 31, 2018. It is important to note that the relief offered by the PBGC is on a case-by case basis and is not specific disaster relief for all filings.
Details of the Relief:
Internal Revenue Service
The IRS has made it easier for 401(k) and other employer-sponsored retirement plans to give loans and hardship distributions to aid victims. A hardship distribution is still limited to the maximum amount permitted by IRS rules but can be provided for any hardship, not just those listed in the IRS regulations, and no post-distribution contribution restrictions are required. However, the normal tax rules still apply to any distribution. Plan loans can be made without following the procedural requirements imposed by the plan at the time of the loan. Finally, qualified plans that do not have loan or hardship distribution provisions can still make loans or hardship distributions, so long as the plan is amended to provide for them by December 31, 2017.
The IRS said it is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. Retirement plans will be permitted to make loans or hardship distributions before they are formally amended to allow for such features. The plan can ignore the reasons that usually apply to hardship distributions, enabling the funds to be used, for instance, for food and shelter. If a plan requires certain documentation to be provided before a distribution can be made, the plan can waive this requirement.
The IRS feels that this relief will allow eligible retirement plan participants to access their money quicker and encounter less red tape. On top of that, the usual six-month ban on 401(k) and 403(b) contributions that typically affects employees who take hardship distributions will not apply.
Department of Labor
Additionally, the DOL requests welfare plans make reasonable accommodations for participants and beneficiaries who are unable to timely file benefit claims or make COBRA elections for the purposes of preserving coverage and providing benefits. The request for accommodation should also include appeals processes and payments for coverage. The DOL will also grant enforcement relief to welfare plans and insurance carriers where appropriate. There is no process to pre-emptively request relief, so plans may wish to document compliance issues caused by Harvey as a precaution.
The DOL also recognizes that some employers and service providers acting on employers’ behalf, such as payroll processing services, located in identified covered disaster areas will not be able to forward participant payments and withholdings to employee pension benefit 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 the provisions of Title I with respect to a temporary delay in the forwarding of such payments or contributions to an employee pension benefit 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.
Pension Benefit Guaranty Corporation
The PBGC is also waiving certain penalties and extending certain deadlines in response to severe storms and flooding from Hurricane Harvey. The relief covers premium payments, reportable event notices and annual employer reporting that were due between August 23, 2017 and January 31, 2018.
For purposes of assessing any late payment or late information penalty, the PBGC will treat as timely any premium filing required to be made for the plan beginning on or after August 23, 2017, and on or before January 31, 2018, if the filing is made by January 31, 2018. Thus, for any such filing, PBGC will waive the applicable penalty, but not the applicable interest charge.
With regard to reportable event notices, plan terminations and requests for reconsideration or appeals, the deadlines have been extended to coincide with the relief provided by the IRS. Thus, all such filings and reports that were normally due between August 23, 2017 and January 31, 2018, have been extended to January 31, 2018.
For annual employer reporting, the regulation permits the filing of certain actuarial information by an alternative due date, which is 15 days after a plan’s Form 5500 due date, if certain requirements are met (29 CFR § 4010.10(b)). If such an alternative due date is based on a Form 5500 for which there is a Form 5500 Disaster Extension, the 15-day period in PBGC’s regulation will automatically be measured from the Form 5500 Disaster Extension Date.
Who is eligible?
401(k) plan participants, along with 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, can be eligible for the streamlined loan procedures and liberalized hardship distribution rules.
Specifically, under the IRS relief, a retirement plan can allow a victim of Hurricane Harvey to take a hardship distribution or borrow up to the specified statutory limits from a storm victim’s retirement plan. Someone who lives outside the disaster area can also take out a retirement plan loan or hardship distribution if they want to use the money to help a son, daughter, parent, grandparent or other dependent that lived or worked in the disaster area. For a list of the counties FEMA has identified, click here.
While IRA participants are barred from taking out loans, they’re also eligible to receive distributions under the looser procedures.
The IRS has stressed that tax treatment of loans and distributions stays unchanged. Typically, 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 usually taxable and subject to a 10-percent early-withdrawal tax. For additional information on the loan and hardship distribution relief for individuals affected by Harvey, please see IRS Announcement.
The relief offered by the PBGC is on a case-by case basis and is not specific disaster relief for all filings.
Mr. Eric Ernest serves as partner of the ERISA Assurance & Compliance Services practice. Eric has more than 25 years of experience in accounting and financial audits for a variety of industries and plan sponsors. For the past 15 years he has planned, managed and supervised hundreds of employee benefit plan audit engagements including defined contribution (savings, ESOP and 401k) plans (including plans requiring Form 11-K filings), defined benefit (traditional pension and cash balance) plans, health and welfare plans (with 401(h) accounts), and master trust investment accounts. Connect with Eric on LinkedIn or Twitter.