Type: Client Alerts
I. Disaster Tax Relief and Airport and Airway Extension Act of 201
On September 29, 2017, the President signed H.R. 3823 (the “Act”) into law. The Act provides tax relief related to retirement plan withdrawals by individuals affected by Hurricanes Harvey, Irma, and Maria.
An individual whose principal place of residence was located in an Affected Area during the Relief Period and who has sustained an economic loss by reason of Hurricane Harvey, Irma, or Maria is an Affected Taxpayer eligible for relief under the Act. The following chart details the Affected Areas and the dates during which relief under the Act applies:
|Affected Area||Relief Period|
|Texas Counties: Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Calhoun, Chambers, Colorado, Dallas, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, Wharton||August 23, 2017 – January 1, 2019|
|All Florida Counties and Seminole Tribe||September 4, 2017 – January 1, 2019|
|All Georgia Counties||September 4, 2017 – January 1, 2019|
|All U.S. Virgin Islands||September 4, 2017 – January 1, 2019|
|Puerto Rico municipios: Adjuntas, Aguas Buenas, Barranquitas, Bayamón, Camuy, Canovanas, Carolina, Cataño, Ciales, Comerío, Culebra, Dorado, Fajardo, Guaynabo, Gurabo, Hatillo, Jayuya, Juncos, Las Piedras, Loiza, Luquillo, Naguabo, Orocovis, Patillas, Quebradillas, Salinas, San Juan, Toa Baja, Utuado, Vega Baja, Vieques, Yauco||September 4, 2017 – January 1, 2019|
|All municipios of Puerto Rico||September 16, 2017 – January 1, 2019|
1. Tax-favored Withdrawals from Retirement Plans
General Rule: Where a taxpayer receives a distribution of any amount from a qualified retirement plan before attaining age 59½, the taxpayer must pay an additional 10% excise tax on the amount of the distribution includible in income.1
- If a taxpayer takes a “Qualified Hurricane Distribution,” the amount of that distribution will not be subject to the 10% excise tax. A “Qualified Hurricane Distribution” is a distribution made during the Relief Period to an Affected Taxpayer.
- The aggregate amount of Qualified Hurricane Distributions, including Qualified Hurricane Distributions made in previous taxable years, may not exceed $100,000 from the plan and all other plans within the controlled group.
- An Affected Taxpayer has three years from the date of receipt of the Qualified Hurricane Distribution to repay the distribution to the plan, provided that a rollover contribution of such distribution could be made to that plan. Affected Taxpayers making repayment contributions to a retirement plan other than an IRA shall be treated as having received the distribution in an eligible rollover distribution and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of distribution.
- A Qualified Hurricane Distribution will not be treated as an eligible rollover distribution, so it will not be subject to automatic 20% income withholding, and the special tax notice required for eligible rollover distributions will not apply.
- The amount of a Qualified Hurricane Distribution normally required to be included in gross income for the taxable year shall be included ratably over the three-year period beginning with such taxable year, unless the Affected Taxpayer elects to have the amount of the distribution included in gross income in the year of distribution.
2. Recontribution of Withdrawals for Home Purchases
- If a taxpayer received a distribution to construct or purchase a principal residence in one of the Affected Areas between February 28, 2017 and September 21, 2017, but does not construct or purchase a principal residence on account of Hurricane Harvey, Irma, or Maria, the taxpayer may contribute that distributed amount to an eligible retirement plan of which the taxpayer is a beneficiary and to which a rollover contribution of such distribution could be made. The taxpayer may make this recontribution from August 23, 2017 to February 28, 2018.
3. Loans from Qualified Plans
General Rule: A loan from a qualified retirement plan is considered a distribution from the plan unless: (i) the loan amount does not exceed the lesser of $50,000 or half of the present value of the employee’s nonforfeitable accrued benefit under the plan, less the highest outstanding balance in the last 12 months, and (ii) the loan is repaid within five years.2
- Until December 31, 2018, the limit for affected taxpayers taking a loan from a qualified employer plan shall be the lesser of $100,000 or the present value of the nonforfeitable accrued benefit of the employee under the plan.
- Where an affected taxpayer has a loan outstanding on or after the first day of the Relief Period and the due date for any repayment of the loan occurs between the first day of the Relief Period and December 31, 2018, the due date will be delayed for one year, any subsequent repayments with respect to the loan shall be adjusted to reflect the delay and accrued interest during the delay, and the delay period shall not be included in determining the 5-year period of the loan.
II. IRS Guidance
The following individuals and entities are eligible for relief as Affected Taxpayers:
An individual (i) whose principal residence is in an Affected Area; (ii) who is a relief worker assisting in an Affected Area; (iii) whose records necessary to meet an applicable deadline are located in an Affected Area; (iv) who is a spouse of an Affected Taxpayer; (v) who was killed or injured as a result of the disaster while visiting the Affected Area; or (vi) who is otherwise designated by the IRS as an Affected Taxpayer
A business whose principal place of business is in an Affected Area or whose records necessary to meet an applicable deadline are in the Affected Area
An estate or trust with tax records necessary to meet an applicable deadline in an Affected Area
The following chart details the Affected Areas, as designated by the Federal Emergency Management Agency (FEMA), and the dates during which the hurricane relief guidance applies:
|Affected Area||Relief Period|
|Texas Counties: Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Calhoun, Chambers, Colorado, Dallas, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, Wharton||August 23, 2017 – January 31, 2018|
|All Florida Counties and Seminole Tribe||September 4, 2017 – January 31, 2018|
|All Georgia Counties||September 7, 2017 – January 31, 2018|
|Affected Area||Relief Period|
|All U.S. Virgin Islands||September 5, 2017 – January 31, 2018|
|Puerto Rico municipios: Adjuntas, Aguas Buenas, Barranquitas, Bayamón, Camuy, Canovanas, Carolina, Cataño, Ciales, Comerío, Culebra, Dorado, Fajardo, Guaynabo, Gurabo, Hatillo, Jayuya, Juncos, Las Piedras, Loiza, Luquillo, Naguabo, Orocovis, Patillas, Quebradillas, Salinas, San Juan, Toa Baja, Utuado, Vega Baja, Vieques, Yauco||September 5, 2017 – January 31, 2018|
|All municipios of Puerto Rico||September 17, 2017 – January 31, 2018|
General Rule: A qualified retirement plan that allows for loans must follow the procedural requirements governing loans in its plan document.
- The IRS will not fault a plan for failing to follow its procedural requirements with regard to loan administration, as long as the plan administrator makes a good faith effort under the circumstances to comply with the plan’s loan requirements, including obtaining required loan documentation.
- Where a plan does not currently allow loans but the plan administrator would like to allow them to assist affected participants in need, the normal deadline for amendment of the plan to allow loans in 2017 has been extended from the end of the 2017 plan year to the end of the 2018 plan year.
- Loan repayments due during the Relief Period will be deemed timely paid if paid by January 31, 2018, and plans with loan grace periods will have their grace periods start on January 31, 2018.
2. Hardship Withdrawals
General Rule: IRS regulations govern the permissible uses for in-service hardship withdrawals, which include prevention of foreclosure or eviction from a principal residence, purchasing or building a principal residence, repair expenses due to casualty damage of a personal residence, certain tuition and educational fees, uninsured medical expenses, and funeral expenses.
- Plans may permit affected participants to make a hardship withdrawal for a different immediate and heavy financial need, and may rely on the affected participant’s representations to substantiate the need (unless the employer has actual knowledge to the contrary).
- Where a plan does not currently allow in-service hardship withdrawals, but the plan administrator would like to allow them to assist participants in need, the normal deadline for amendment of the plan to allow hardship withdrawals in 2017 has been extended from the end of the 2017 plan year to the end of the 2018 plan year.
General Rule: An employee’s elective deferrals and contributions to the plan and all other plans maintained by the employer’s controlled group are normally suspended for 6 months after an in-service hardship withdrawal.
Relief Granted: Suspension of contributions by an affected participant is not required after a hardship withdrawal during the Relief Period.
3. Blackout Notices
General Rule: The plan administrator of an individual account plan must provide 30 days’ notice to participants and beneficiaries whose ability to direct investments, obtain loans, or obtain other distributions from the plan is temporarily suspended, limited, or restricted for more than 3 business days, except when the inability to provide such notice is due to events beyond the reasonable control of the plan administrator and a fiduciary so determines in writing.
Relief Granted: The DOL will not allege a violation of the advance notice requirement for a blackout period related to Hurricane Harvey, Irma, or Maria solely on the basis that a fiduciary did not make the required written determination.
4. Leave-Based Donations
Cash payments an employer makes to charitable organizations designated under § 170(c) of the Internal Revenue Code of 1986 in exchange for employees’ donated vacation, sick, or personal leave will not be considered gross income or wages if the payments are made for the relief of victims of Hurricane Harvey, Hurricane and Tropical Storm Irma, or Hurricane Maria before January 1, 2019. Such a donation will not result in constructive receipt of gross income or wages for employees, but employees and employers may not claim a § 170 charitable deduction.
5. Additional Extended Deadlines
To the extent that any of the deadlines related to retirement plans listed below fall during an applicable Relief Period, those deadlines have been extended to January 31, 2018:
|Making deductible contributions to a qualified plan||Plan administrator of a qualified plan|
|Issuance of a refund of contributions in connection with failed nondiscrimination testing to avoid both the 10% excise tax and plan disqualification||Plan administrator of a 401(k) plan|
|Filing Form 5500||Plan administrator of a qualified plan|
|Self-correction for significant operational failures under the Employee Plans Compliance Resolution System (“EPCRS”)||Plan administrator of a qualified plan|
|Making the required minimum contribution for the plan year||Plan administrator of a single-employer defined benefit plan|
|Election relating to the plan’s prefunding balance or funding standard carryover balance||Plan administrator of a single-employer defined benefit plan|
|Certification of the adjusted funding target attainment percentage (AFTAP)||Plan administrator of a single-employer defined benefit plan|
|Furnishing notice that the plan has become subject to limitations on shutdown benefits and other unpredictable contingent event benefits and accelerated benefit distributions||Plan administrator of a single-employer defined benefit plan|
|Certification whether a multiemployer plan is in endangered or critical status and whether it is making scheduled progress pursuant to its funding improvement or rehabilitation plan
||Plan administrator of a multiemployer defined benefit plan|
|Adoption of or updates to funding improvement or rehabilitation plan for multiemployer plans in endangered or critical status||Plan administrator of a multiemployer defined benefit plan|
|Making required minimum distributions||Plan administrator of a defined contribution plan|
||Qualified plan participants|
|Distribution of cash dividends to participants and beneficiaries
||Plan administrator of an employee stock option plan (“ESOP”)|
|Granting put options for employers required to repurchase employer securities
||Plan administrator of an ESOP|
|Exercise of put option
|Repurchasing employer securities by employer in substantially equal periodic payments
||Plan administrator of an ESOP
|Distribution of a participant’s account balance
||Plan administrator of an ESOP
III. PBGC Guidance
The Pension Benefit Guaranty Corporation (“PBGC”) has extended the following deadlines for Affected Taxpayers to January 31, 2018 if the deadline originally fell during a Relief Period:
- Filing reportable post event notice of reportable event
- Requesting reconsideration or appeal of a PBGC determination
- Paying PBGC premiums (late payment penalties are waived, but interest still accrues)
- Filing standard or distressed termination notices
- Distributing plan assets in a standard termination and filing the post-distribution certification
- Other multiemployer plan PBGC filings and notices to persons other than the PBGC
IV. DOL Guidance
General Rule: The DOL has set certain deadlines for benefit claims and appeals under group health plans, responses to benefit claims and appeals, notices to participants regarding healthcare continuation coverage under COBRA, and COBRA coverage election.
Relief Granted: These deadlines will not be enforced for Affected Taxpayers provided that plan fiduciaries make reasonable accommodations to prevent the loss of benefits and take steps to minimize the possibility of a loss of benefits because of a failure to comply with pre-established timeframes.
As their recovery efforts are underway, plan sponsors and plan administrators should take this opportunity to review these relief guidelines and communicate with participants regarding any updates on their benefits. We encourage all affected employers to visit IRS.gov, DOL.gov, and PBGC.gov for more information. Employers experiencing difficulties meeting IRS, DOL, or PBGC deadlines due to hurricane-related service interruptions who do not otherwise meet the current requirements for relief may contact the appropriate agency to request case-by-case relief.
- A few exceptions to this general rule already exist, such as distributions after the death or disability of the plan participant, or distributions to a participant who terminates employment after age 55.
- A longer period may be applicable to a principal residence loan.
Client Alert 2017-247