Tax-Free Disaster Assistance to Employees
Section 139 of the Internal Revenue Code (“Code”) allows an employer (or other entities) to provide tax-free disaster relief to its employees in those instances where the payments constitute qualified disaster relief payments. Generally, a “qualified disaster relief payment” includes any amounts paid to an individual that are not otherwise compensated for by insurance or otherwise:
- 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 of a rented or owned personal residence and/or the repair or replacement of its contents as a result of a qualified disaster.
A “qualified disaster” under Code Section 139 includes a presidential-declared disaster or an event that the Secretary of the Treasury determines to be catastrophic. To date, several Texas Counties and Louisiana Parishes have been designated as having suffered a qualified disaster.
In addition to being tax free to the recipient, qualified disaster relief payments are not subject to withholding or employment taxes. And, the payments made by an employer or other entity are deductible.
IRS Relief Assistance
Issued on August 30, 2017, IRS Announcement 2017-11 permits participants to make certain hardship or emergency withdrawals and loans from tax-favored retirement plans made on or after August 23, 2017 through January 31, 2018. This relief is available to participants who work or live in a designated Harvey disaster area and to participants with relatives (spouses, children, parents, grandparents and other dependents) who work or live in a designated Harvey disaster area.
Plans are not required to take advantage of this relief and may adopt some portions but not all of the guidance. Under the Announcement, plans may make loans to affected employees or former employees whether or not the document currently allows for such loans. In addition, hardship distributions to affected employees or former employees may be made even if the plan document does not currently provide for hardship distributions. However, if loans or distributions are permitted in these circumstances, the plan will need to be amended to permit these loans or distributions (if not already provided for) not later than the end of the 2018 plan year.
In addition to the Announcement, on August 29, 2017, the IRS issued a news release which extends the deadlines for filing tax returns and submitting tax payments that would otherwise be required on or after August 23, 2017, to taxpayers located in the areas impacted by Hurricane Harvey. See IRS New Release Tx-2017-09. For certain forms required to be filed on or after August 23, 2017, and before January 31, 2018, this release extends a wide-range of tax filing deadlines through January 31, 2018, including individual income tax, excise and employment taxes, Form 990 for tax-exempt organizations, Form 5500s and 83(b) elections.
DOL Relief Assistance
Also on August 30, 2017, the DOL issued compliance guidance for retirement plans affected by Hurricane Harvey. In this guidance, the DOL announced that it will not pursue claims for temporary delays in remitting contributions and plan loan repayments to the plan’s trust where the delay is caused by Hurricane Harvey. This relief is only available to the extent that an employer takes steps to comply with the more stringent rules relating to remittance of contributions and loan repayments as soon as practicable under the circumstances.
In addition, the DOL has stated that it will not allege a violation of the general 30-day blackout notice period. Under normal rules, a plan administrator must either provide 30 days’ advanced written notice when a participant’s right to direct investments or obtain loans are restricted by a blackout period—or have determined in writing that a blackout notice could not be provided because of factors beyond the plan administrator’s control. Finding that hurricanes are beyond the control of the plan administrator, the DOL has stated that it will not allege a violation of the blackout notice requirement solely because the plan fiduciary failed to make a written determination that notices could not be provided.
PBGC Relief Assistance
On August 29, 2017, the PBGC issued Disaster Relief 17-09, which generally waives late premium payment penalties and extends certain other deadlines applicable to pension plans governed by the PBGC and impacted by Hurricane Harvey. In addition, for plans not covered by this specific relief, the PBGC has stated that it will grant other relief to pension plans on a case-by-case basis.
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In light of Hurricane Irma and the continuing impact of Hurricane Harvey, we expect the expansion of the applicability of current relief, as well as the release of additional guidance concerning how an employer may assist those employees who have been directly impacted by the disasters. We will provide updates as they are announced.