On August 14, 2016, President Obama declared a major disaster in the State of Louisiana due to the severe storms and flooding that took place in several State parishes (“Louisiana Storms”). Following the declaration, the Internal Revenue Service (IRS) issued guidance postponing certain tax filings and payment deadlines for taxpayers who reside or work in the disaster area. The relief also provides qualifying individuals with expanded access to their retirement plan assets to alleviate hardships caused by the Louisiana Storms. Below is a summary of the filing extension for the Form 5500 series and administrative changes that employers can make to expedite plan loans and hardship distributions to Louisiana Storm victims.
Extension of Filing Deadlines
Plan sponsors in the affected parishes listed below now have until January 17, 2017, to file Form 5500 series returns, provided the return had an original or extended due date falling on or after August 11, 2016, and before January 17, 2017.
Relaxation of Hardship Distribution and Plan Loan Requirements
IRS Announcement 2016-30 (“Announcement”), issued on August 30, 2016, modifies certain verification procedures that may be required under retirement plans with respect to loans and hardship distributions. This relief allows qualifying individuals to quickly access assets in their “qualified employer plan” to alleviate hardships caused by the Louisiana Storms. Qualifying individuals include employees and former employees who have a principal residence or place of employment on August 11, 2016, located in one of the parishes identified below or who have a son, daughter, parent, grandparent, or other dependent with a principal residence or place of employment in one of the listed parishes on that date (“Qualifying Individuals”).
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Acadia
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Ascension
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Avoyelles
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East Baton Rouge
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East Feliciana
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Evangeline
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Iberia
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Iberville
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Jefferson Davis
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Lafayette
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Livingston
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Pointe Coupee
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St. Helena
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St. Landry
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St. Martin
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St. Tammany
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Tangipahoa
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Washington
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West Feliciana
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Vermilion
Other parishes may be added based on damage assessment by Federal Emergency Management Agency (FEMA).
The amount available for a hardship distribution is limited to the maximum amount permitted under the retirement plan and the IRS rules. However, Qualifying Individuals are permitted to use hardship proceeds for any hardship arising from the Louisiana Storms, for example, to repair or replace a home and to acquire food and shelter. Also, a Qualifying Individual may continue to make elective deferrals into the plan (the usual requirement to suspend deferrals for six months does not apply). Plan administrators may rely on the Qualifying Individual’s representations as to the need for and amount of the hardship distribution, unless the plan administrator has actual knowledge to the contrary. As soon as practicable the plan administrator can obtain any required documentation from the participant. Hardship distributions are includible in gross income and subject to the 10 percent excise tax that normally applies to a payment made before age 59-1/2 (unless Congress provides relief).
The IRS is also relaxing procedural and administrative rules that may apply to plan loans for a need arising from the Louisiana Storms. For example, if spousal consent is required for a plan loan or distribution and the employee claims his or her spouse is deceased, the plan may make the loan in the absence of a death certificate if it is reasonable to believe, under the circumstances, that the spouse is deceased, and the plan administrator makes reasonable efforts to obtain a copy of the death certificate as soon as practicable.
For purposes of the Announcement, a “qualified employer plan” includes a plan that meets the requirements of Code sections 401(a), 403(a), and 403(b), or a plan described in Code Section 457(b). Defined benefit plans and money purchase pension plans qualify, but only with respect to in-service hardship distributions from separate accounts, such as employee contributions or rollover amounts.
To qualify for relief, the plan loan or hardship distribution must be made no earlier than August 11, 2016, and no later than January 17, 2017.
If your retirement plan does not provide for loans or hardship distributions but you would like to allow storm victims to obtain loans or hardships, or if you would like to add flexibility to existing plan provisions, the plan must be amended no later than the end of the first plan year beginning after December 31, 2016 (December 31, 2017, for calendar year plans).
Timothy Brechtel, Susan Chambers & Ricardo X. Carlo of Jones Walker LLP