Employers seeking to ease the hardships faced by employees in the aftermath of Hurricane Harvey may be looking for ways to provide aid to their own workforces.
Qualified Disaster Relief Payments
Generally, a payment by an employer to an employee is considered taxable income. Employers, however, can provide benefits on a tax-free basis to employees who are victims of Hurricane Harvey under Section 139 of the Internal Revenue Code, which provides that an employer can give cash or other benefits to assist employees in the case of a presidentially declared disaster. The payments are exempt from federal income tax and employment taxes, no substantiation is required from the employees, and the employer is able to deduct the payments.
President Trump declared Harvey a “federally declared disaster” under Code Section 165(h)(3)(C(i), which opens the door to allow an employer to make disaster relief payments to its employees on a tax-free basis pursuant to Code Section 139 for the following purposes:
- to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a “qualified disaster;” or
- to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents, to the extent that the need for that repair, rehabilitation, or replacement results from a “qualified disaster.”
NOTE: Qualified disaster relief payments do NOT include payments/expenses that will be compensated by insurance or other sources or a substitute for income replacement/lost wages. Payments by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a “qualified disaster” are eligible for the beneficial tax treatment, however.There are no limits on these payments under Code Section 139. In addition, under Internal Revenue Service guidance (Revenue Ruling 2003-12), because of the extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account for actual expenses in order to qualify for the Code Section 139 income exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred. However, we recommend that, due to the scope of Hurricane Harvey and the volume of employees affected by the disaster, employers institute a procedure for collecting and reviewing requests for relief and for making reasonable and necessary payments to solely meet the immediate need of employees on this basis. These procedures may include seeking adequate documentation from individuals to, at a minimum, verify that the company only pays “qualified disaster relief payments” to employees and that to its knowledge such funds are not being reimbursed by other sources and are not wage replacement payments (both of which would result in taxation of the payments and require income and employment tax withholding). This minimal documentation can be accomplished with a short application form that an employee can sign explaining the reasonable and necessary expense needed along with an acknowledgement that the payment is not being paid from any other source (insurance or other sources) and that it is not being paid to the employee for lost wages/income replacement.
Employee Benefit Plan Relief
The Internal Revenue Service (IRS), the Department of Labor (DOL) and Pension Benefit Guaranty Corporation (PBGC) have issued temporary relief for employee benefit plans with participants who live or work in the Hurricane Harvey disaster area.
Qualified Plan Loan, Hardship and Other Distributions
The IRS issued relaxed rules for hardship distributions, plan loans and other qualified plan distributions made on or after August 23, 2017 through January 31, 2018 from 401(a), 403(b) and 457(b) plans that could, if they contained enabling language, make such distributions and loans. This relief is available to participants who work or live in one of the Texas counties identified for individual assistance by the Federal Emergency Management Agency because of the devastation caused by Hurricane Harvey or who have a lineal ascendant or descendant (children, parent, grandparent), dependent or spouse who live or work in one of the affected counties. If the plan does not provide for plan loans or hardship distributions, the plan must be amended before the end of the first plan year beginning after December 31, 2017 (by December 31, 2018 for calendar year plans) to allow such loans or hardship distributions.
Form 5500 Extensions
- Hardship Distributions
- A qualified retirement plan may make a hardship distribution based on the participant’s representations as to the need for and the amount of the distribution, unless the plan administrator has actual knowledge to the contrary.
- The IRS relief applies to any hardship of the employee, not just the types set out in the regulations. In this regard, affected participants can take hardship distributions to pay for food, housing and other necessities as a result of the storm, as long as the distribution is not in excess of the amount required to satisfy the need.
- No post-distribution contribution restrictions are required. Thus, plans will not be required to impose a six-month suspension of elective deferrals on affected participants who take a Hurricane Harvey hardship withdrawal.
- Plan Loans
- A plan may disregard procedural requirements for plan loans and other distributions provided that the plan administrator makes a good-faith effort under the circumstances to comply with the requirements, and as soon as practicable, makes a reasonable attempt to assemble any foregone documentation.
The IRS has extended the filing deadline for Form 5500s to January 31, 2018. This relief applies to plan sponsors whose principal place of business is located in a disaster area or whose records necessary to file the Form 5500 are in the covered disaster area and with respect to Form 5500s with original due dates (or original due dates with extensions) between August 23, 2017 and January 31, 2018.
DOL Temporary Relief
- Under DOL regulations, employers are required to forward participant contributions and loan repayments to the plan on the earliest date such amounts can be segregated from the employer’s assets but no later than the 15th business day of the following month. The DOL has stated that it will not seek to enforce claims under Title I of ERISA with respect to a temporary delay in forwarding such contributions and loan repayments that is caused by Hurricane Harvey.
- The DOL also announced that it will not allege a violation of the blackout notices solely on the basis that a plan fiduciary did not make a written determination of the inability to provide the notice. Plan administrators generally must provide participants with 30 days advance written notice when a participant’s ability to direct investments, obtain loans or other distributions from the plan is suspended or restricted for more than three days.
- The DOL recognizes that plan participants and beneficiaries may encounter difficulties meeting certain deadlines for filing benefit claims and COBRA elections. Plan fiduciaries should make reasonable accommodations to prevent the loss of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established guidelines.
The PBGC has extended the deadline for certain of its required filings and premium payments for plan administrators and plan sponsors located in covered disaster areas to January 31, 2018. This relief covers any premium filing between August 23, 2017 and January 31, 2018, and notices and plan asset distributions with standard and distress terminations of pension plans.
The PBGC relief does not cover every situation in which PBGC disaster relief may be warranted. According to the PBGC, this announcement does not provide relief for filings that involve particularly important or time sensitive information where there may be a high risk of substantial harm to participants or the PBGC insurance program, such as notices of large missed contributions under ERISA Section 302(f), advance notices of reportable events and annual financial and actuarial information for certain controlled groups.
Under IRS Notice 2017-48, employers who make cash payments to a charitable organization described in Section 170(c) in exchange for vacation, sick and personal leave that an employee elects to forgo will be entitled to a deduction as a business expense rather than a charitable contribution as long as donation is made to the charitable organization for the relief of victims of Hurricane Harvey before January 1, 2019. The value of the donated leave will not be included in employees’ gross income.
We anticipate that the Internal Revenue Service will announce similar relief for employers and participants in areas affected by Hurricane Irma.