By Carol Buckmann
You don’t have to have employees in the disaster areas to be able to provide relief for victims of the 2017 hurricanes through your 401k plan. IRS announcements and a new law enable participants to take withdrawals to help relatives who were seriously impacted by hurricanes Harvey, Maria and Irma if their plan permits hurricane distributions. Special rules also allow plans to permit loans for relief even if the plan terms don’t currently provide for loans. However, the agencies in charge aren’t making it easy for plan sponsors who want to help.
Recent legislation signed by President Trump in October further eases up on these rules, but we still have no official interpretation of the new law, which provides substantial tax benefits to recipients of these distributions. And it wasn’t until very recently that we got guidance from Puerto Rico’s Hacienda, which must be consulted by dual-qualified plans as well as plans that are qualified only in Puerto Rico.
Here is a summary of the situation for plan sponsors who want to help.
Who is Eligible?
Participants, regardless of where they live or work, may get hardship distributions without having to satisfy the usual hardship standards (and without having future contributions suspended temporarily) if the distributions are to help themselves or a spouse, dependent, parent, grandparent or child who lived or worked in a disaster area and was impacted by the hurricanes. Employers are allowed to rely on participant representations about need and aren’t required to investigate. The IRS administratively allows such distributions through March 15, 2018, but the new legislation permits distributions through 2019. Puerto Rico permits special distributions through June 30, 2018 but a sworn statement from the participant giving particulars is required.
IRS so far has said that in addition to regular tax, the 10% penalty on early distributions may apply, but the new law says that it will not. (Like regular hardship distributions, these distributions are not eligible to be rolled over.) The new law also permits participants to spread the tax liability over 3 years and gives them a time-limited right to recontribute the distribution to the plan. We have no guidance explaining how that will work. Puerto Rico has determined that qualifying distributions will not be subject to tax at all if they don’t exceed $10,000, and can be subject to a flat 10% tax if they don’t exceed $100,000 and withholding is made.
What about Loans? IRS says that you can make a loan for hurricane relief even if your plan doesn't currently provide for loans. The new law would increase the permissible loan amount from $50,000 to $100,000 and provide that payments could be waived during the first year. Puerto Rico says that loan repayments may be modified.
Are Amendments Required? Employers who choose to provide hurricane-related relief will have until 2018 (2019 under the new law) to adopt formal plan amendments.
Still confused? You are not alone. The IRS chose to issue recent Maria relief that doesn’t reflect or mention the existence of the new law. It is important for the agencies issuing guidance to acknowledge the overriding provisions of the new law and try to make their rules consistent. I hear that some vendors are refusing to apply the new provisions due to the lack of guidance, which is frustrating the intention of the relief. While we couldn’t change the path of the hurricanes, this lack of coordination and up-to-date guidance is a situation the agencies can fix.