Participant Loans, Hurricane & California Wildfires Loans, & Disaster Loans

Transcription

1 Participant Loans, Hurricane & California Wildfires Loans, & Disaster Loans Description Normal Loan Rules CA Wildfires Loans General Disaster Loans What types of loans are available? General purpose loans, hardship loans or other specified loans Hurricane Harvey, Irma, Maria and California ( CA ) Wildfires Loans Disaster Loans What is the statutory and other governmental authority? IRC section 72(p) and Treasury Reg. Section 1.72(p)-1, 1.403(b)- 6(f), (f)(2) Hurricane Harvey (IRS Announcement ), Hurricane Irma (IRS Announcement ), and Hurricane Maria and California Wildfires (IRS Announcement ) Disaster Tax Relief and Airport and Airway Extension Act of 2017 ( Act ) and the Bipartisan Budget Act of 2018 ( Budget Act ) What plans are eligible? 401(a) (including 401(k)), 403(b) and governmental 457(b) plans 401(a) (including 401(k)), 403(b) and governmental 457(b) plans 401(a) (including 401(k)), 403(b) and governmental 457(b) plans Eligibility What individuals are eligible to request these types of loans? Participants if loans are allowed. Participants who were affected by the hurricane or to assist a son, daughter, parent, grandparent or other dependent that lived or worked in the disaster area on specified date are impacted, Hurricane Harvey on August 23, 2017, Hurricane Irma on September 4, 2017, Hurricane Maria on September 16, 2017 for the U.S. Virgin Islands and on September 17, 2017 for Puerto Rico, and the California Wildfires on October 8, For example, a father could obtain a loan from his plan and provide the funds to his daughter whose principal residence was located in one of the affected areas. Participants whose principal place of abode on August 23, 2017 for Hurricane Harvey, September 4, 2017 for Hurricane Irma, and September 16, 2017 for Hurricane Maria, or from October 8, 2017 through December 31, 2017 for the California Wildfires that was located in a disaster area and who sustained economic losses as a result of one of the disasters. These are called qualified individuals. (This includes both active and former employees.) Relatives of participants do not qualify for any special relief. 1

2 Participant Loans, Hurricane & California Wildfires Loans, & Disaster Loans Description Normal Loan Rules CA Wildfires Loans Loan requirements Disaster Loans What amount is available for a participant s loan? Generally the total amount available from all plans of the employer and any related employers for all participant loans is the lesser of 50% of the participant s vested account balance or $50,000 reduced by the highest outstanding balance of all loans during the past twelve months. Same as the Normal Loan Rules. For participants who are qualified individuals, the total amount available from all plans of the employer and any related employers for all loans is increased to the lesser of 100% of the participant s vested account balance or $100,000 reduced by the highest outstanding balance of all loans during the past twelve months. 2

3 Participant Loans, Hurricane & California Wildfires Loans, & Disaster Loans Description Normal Loan Rules CA Wildfires Loans Does a participant have to provide collateral for the loan? Up to 50% of a participant s vested account balance as of the date of the loan will be used as collateral for a loan. Generally a participant can only borrow more than 50% of his or her vested account balance when his or her vested account balance is less than $10,000. However, the participant in that situation must provide additional collateral as required under the Employee Retirement Income Security Act of 1974, as amended ( ERISA ). Same as the Normal Loan Rules. Disaster Loans Same as the Normal Loan Rules, except that we anticipate that the Department of Labor (DOL) will waive the additional collateral requirement as they did for participants who were affected by Hurricane Katrina as indicated in IRS Notice When are participant loans available? The plan document will specify the available period. Loans are available for Hurricane Harvey on August 23, 2017 and Hurricane Irma on September 4, 2017 through January 31, Loans are available for Hurricane Maria on September 16, 2017 for the U.S. Virgin Islands and on September 17, 2017 for Puerto Rico, and the California Wildfires on October 8, 2017 through March 15, Loans are available for Hurricane Harvey on August 23, 2017, Hurricane Irma on September 4, 2017, Hurricane Maria on September 16, 2017, and for the California Wildfires on October 8, 2017, through December 31,

4 Participant Loans, Hurricane & California Wildfires Loans, & Disaster Loans Description Normal Loan Rules CA Wildfires Loans When are loan repayments due? A participant s loan must be repaid at least quarterly, unless the participant is on an approved leave of absence, either for a nonmilitary (which cannot exceed the lesser of twelve months or the period of the approved leave) or military (which cannot exceed the period of the approved leave.) Same as the Normal Loan Rules. Disaster Loans Loan repayments for a qualified individual s loan that was outstanding on or after August 23, 2017 for Hurricane Harvey, on or after September 4, 2017 for Hurricane Irma, and on or after September 16, 2017 for Hurricane Maria that are due between the aforementioned date, and for the California Wildfires on or after October 8, 2017 and ending on December 31, 2018 shall be suspended for one year. The loan repayments must resume upon the end of the suspension period, and the term of the loan may be extended by the duration of the suspension period. What is the term of a participant s loan? What is the interest rate for a loan? A participant s loan must be for a period of five years or less unless it is for the purchase of the participant s principal residence and the plan document includes the relevant provision to allow it. The interest rate must be reasonable and commensurate with the rate that would be charged to an individual who had a similar type of loan for plans subject to ERISA. The same standard will generally apply to 403(b) plans that are subject to ERISA and governmental 457(b) plans (which are not ERISAcovered). Same as the Normal Loan Rules. Same as the Normal Loan Rules. The maturity date of the loan can be extended for one year if the loan repayments are suspended even if that would extend the term of the loan beyond a five year period or longer for a loan that was for the purchase of a principal residence. However, interest will continue to accrue on the loan during the suspension period. Same as the Normal Loan Rules. 4

5 Participant Loans, Hurricane & California Wildfires Loans, & Disaster Loans Description Normal Loan Rules CA Wildfires Loans Is spousal consent required for a loan? If the primary form of payment under the plan is a joint and survivor annuity then a participant s spouse must consent to the loan. In addition, an employer may elect to require spousal consent. Same as the Normal Loan Rules. Disaster Loans Same as the Normal Loan Rules. Is a retroactive plan document amendment required? N/A Yes, the plan document must be amended by the last day of the plan year that begins in 2018 if the plan does not include a participant loan provision. Otherwise the plan document does not need to be amended to comply with the relief included in the IRS guidance. However, plan sponsors may have to amend their Service Agreement if they are using the Fidelity Volume Submitter Plan Document to change their loans procedures for changes to the minimum loan amount or to increase the number of outstanding loans that may be available to participants. Plan sponsors that instead have Plan Administration Manuals may have to amend them for changes to their loan procedures. Plan sponsors should contact their Fidelity representative to determine if any changes need to be made to Fidelity agreements. Yes, the plan document must be amended by the last day of the plan year that begins in Fidelity will be drafting a good faith amendment for distribution to plan sponsors that are using the Fidelity Volume Submitter Plan Documents (both 401(a)/(k) and 403(b)). In addition, plan sponsors should contact their Fidelity representative to determine if any changes need to be made to other Fidelity agreements. 5

6 Participant Loans, Hurricane & California Wildfires Loans, & Disaster Loans Description Normal Loan Rules CA Wildfires Loans Working with Fidelity on plan operation and administration Disaster Loans Does a plan sponsor have to follow the plan s procedural requirements? Yes No, a plan will not be treated as failing to follow procedural requirements imposed by the terms of the plan merely because those requirements are disregarded for any period beginning on or after the date of the hurricane and continuing through January 31, 2018 for Hurricane Harvey and Irma, and through March 15, 2018 for Hurricane Maria and the California Wildfires. For example, a plan does not have to impose a minimum loan amount or a limit on the number of Hurricane Harvey, Irma & Maria hardship loans. However, the plan administrator must make a good-faith effort under the circumstances to comply with the requirements. Fidelity will update the Plan Administration Manual for plan sponsors with individually designed plan documents and other plan sponsors, if appropriate. This was not addressed by the Act. The Act does not require a plan to impose a minimum loan amount or a limit on the number of loans. However, a plan sponsor may impose a minimum loan amount or a limit on the number of loans. The plan sponsor may want to establish different procedural requirements for Disaster Loans. Fidelity will update the Plan Administration Manual for plan sponsors with individually designed plan documents and other plan sponsors, if appropriate. How do I set up the Hurricane Loans and/or Disaster Loans for my plan? N/A A plan sponsor must complete and sign an election form to establish these loans on Fidelity s systems. Please contact your Fidelity representative for further information. A plan sponsor must complete and sign an election form to establish the Disaster Loans on Fidelity s systems. We anticipate that this form will be available in early November. Please contact your Fidelity representative for further information. 6

7 , Hurricane & California Wildfires Distributions, & General What type of distribution is available? What is the statutory and other authority? Hardship Withdrawal and unforeseeable emergency distributions for governmental 457(b) plans IRC Section 401(k)(2)(B)(IV), Treasury Regulation Section (b)(ii), IRC Section 457(d)(1)(A)(iii), Treasury Regulation Section (c) Hurricane Harvey, Irma, Maria and California ( CA )Wildfires Hardship Withdrawals Hurricane Harvey (IRS Announcement ), Hurricane Irma (IRS Announcement ), and Hurricane Maria and California Wildfires (IRS Announcement ) (These distributions are known as Qualified Hurricane Distributions under the Act and as Qualified Wildfires Distributions under the Budget Act). Disaster Tax Relief and Airport and Airway Extension Act of 2017 ( Act ) and the Bipartisan Budget Act of 2018 ( Budget Act ) What types of plans are eligible? 401(a) (including 401(k)), 403(b) and governmental 457(b) plans 401(a) (including 401(k)), 403(b) and governmental 457(b) plans 401(a) (including 401(k)), 403(b) and governmental 457(b) plans Eligibility Which individuals are eligible to request distributions? Generally active employees Participants who were affected by the hurricane or to assist a son, daughter, parent, grandparent or other dependent that lived or worked in the disaster area on specified date are impacted, Hurricane Harvey on August 23, 2017, Hurricane Irma on September 4, 2017, Hurricane Maria on September 16, 2017 for the U.S. Virgin Islands and on September 17, 2017 for Puerto Rico, and the California Wildfires on October 8, For example, a father could obtain a hardship withdrawal from his plan and provide the funds to his daughter whose principal residence was located in one of the affected areas. Participants whose principal place of abode on August 23, 2017 for Hurricane Harvey, September 4, 2017 for Hurricane Irma, and September 16, 2017 for Hurricane Maria, or from October 8, 2017 through December 31, 2017 for the California Wildfires that were located in a disaster area and who sustained economic losses because of one of the disasters. They are called qualified individuals. (This includes both active and former employees.) Relatives of participants do not qualify for any special relief. 7

8 , Hurricane & California Wildfires Distributions, & What is the purpose of the hardship withdrawal or distribution? An immediate and heavy financial need of the participant. Generally, the participant must take all available plan loans and other available plan distributions before requesting the hardship distribution. An unforeseeable emergency distribution for a governmental 457(b) plans is... a severe financial hardship of the participant or beneficiary resulting from extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or the beneficiary. A hardship must be for a need arising from Hurricane Harvey, Irma, Maria or the California Wildfires. Generally, the participant must obtain all available plan loans and other available plan distributions before requesting the hardship distribution. A distribution for qualified individuals who sustained economic losses because of the hurricane or California Wildfires. A participant does not have to obtain a plan loan or other available plan distributions before requesting the distribution. A qualified individual can obtain a Disaster Distribution without regard to whether the distribution was specifically on account of the relevant hurricane or California Wildfire. When are the hardship withdrawals or distributions available? The plan document will specify the available period. Hardship withdrawals are available for Hurricane Harvey on August 23, 2017 and Hurricane Irma on September 4, 2017 through January 31, Hardship withdrawals are available for Hurricane Maria on September 16, 2017 for the U.S. Virgin Islands and on September 17, 2017 for Puerto Rico, and the California Wildfires on October 8, 2017 through March 15, are available for Hurricane Harvey on August 23, 2017, Hurricane Irma on September 4, 2017 and Hurricane Maria on September 16, 2017, and for the California Wildfires on or after October 8, 2017, through December 31, What amount available for a hardship withdrawal or distribution? The amount necessary to satisfy the financial need, plus associated taxes due to the withdrawal. The amount necessary to satisfy the need arising from the hurricane. Participants may request up to $100,000 in total from all 401(k), 403(b), 457(b) plans, and IRAs. The definition of qualified hurricane distribution or qualified wildfires distribution does not limit the amount that the participant requests to the amount of the economic loss suffered by the qualified individual. 8

9 , Hurricane & California Wildfires Distributions, & The hardship withdrawal or distribution must be on account of: an immediate and heavy financial need for: medical care, the purchase of a principal residence, educational payments, the prevention of a foreclosure or eviction from a principal residence, funeral and burial expenses, or repairs to a principal residence because of a casualty loss. An unforeseeable emergency distribution for a governmental 457(b) plan is generally, a severe financial hardship of the participant or beneficiary resulting from: an illness or accident, loss of property due to a casualty (e.g., the need to rebuild a home following damage to a home not otherwise covered by homeowner's insurance, such as damage that is the result of a natural disaster), other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or the beneficiary (facts and circumstances determination). a need arising due to Hurricane Harvey, Irma, Maria or the California Wildfires. The IRS did not provide much guidance on the acceptable expenses other than for food and shelter. However, other life essential expenses should qualify, such as medicine and transportation expenses. A qualified individual must have had his or her principal place of abode on the relevant date located in a disaster area, and sustained an economic loss because of the hurricane or California Wildfire in a designated disaster area on the applicable destruction date in order to obtain a Disaster Distribution. Examples of economic losses include, but are not limited to one of the following based on IRS Publication 4492: loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause; loss related to displacement from your home; or loss of livelihood due to temporary or permanent layoffs. IRS Notice , which was used to clarify several issues for Hurricane Katrina, could be used to infer that are permitted without regard to the qualified individual s need and the amount of the distribution is not required to correspond to the amount of the economic losses suffered by the qualified individual. 9

10 , Hurricane & California Wildfires Distributions, & The hardship withdrawal or distribution must be on account of: (continued) For example the: o imminent foreclosure of o or eviction from primary residence, o need to pay for medical expenses (e.g., nonrefundable deductibles, cost of prescription drug medication), o need to pay for the funeral expenses of a spouse or a dependent of a participant or beneficiary The purchase of a home or the payments of college tuition are not unforeseeable emergencies. 10

11 , Hurricane & California Wildfires Distributions, & Do future participant deferral contributions have to be suspended for six months after receipt of the withdrawal or distribution? Yes for 401(k) and 403(b) plans; no for governmental 457(b) plans. No No What documentation is required for the participant to prove the need? The participant must make a representation or provide documentation that the amount of the hardship withdrawal is for an immediate and heavy financial need, based on the plan s procedures. A plan administrator may rely on participant representations as to the need for and amount of a hardship distribution unless they have actual knowledge to the contrary. Participants should be directed to keep the supporting documentation to substantiate the withdrawal. A plan administrator may rely on a participant s reasonable representation that he or she is a qualified individual unless they have actual knowledge to the contrary. However, it initial appears that there will be limited need to provide proof of economic loss to the plan administrator. 11

12 , Hurricane & California Wildfires Distributions, & Is spousal consent required for a hardship withdrawal or distribution? If the primary form of payment under the plan is a joint and survivor annuity then a participant s spouse must consent to the hardship withdrawal. In addition, an employer may elect to require spousal consent. If the primary form of payment under the plan is a joint and survivor annuity then a participant s spouse must consent to the withdrawal. In addition, an employer may elect to require spousal consent. If the primary form of payment under the plan is a joint and survivor annuity then a participant s spouse must consent to the distribution. In addition, an employer may elect to require spousal consent. Income Taxes Is a hardship withdrawal or distribution subject to required 20% federal tax withholding? No. The distribution is subject to a 10% federal tax withholding, unless the participant chooses to not have federal tax withheld from the distribution. Same as normal hardship rules. Same as normal hardship rules. Does the plan administrator have to provide the individual with the model IRS 402(f) notice that explains the income tax withholding and rollover contribution options? No No No, however Fidelity has created a notice that explains the basic provisions of the Act or Budget Act. 12

13 , Hurricane & California Wildfires Distributions, & What amount is subject to federal income tax? The amount distributed is taxable in the year of distribution. However, the amount attributable to Roth contributions will not be subject to income tax since it has already been taxed to the individual. The amount distributed is taxable in the year of distribution. However, the amount attributable to Roth contributions will not be subject to income tax since it has already been taxed to the individual. Participants who receive this distribution will have their income spread evenly over a three year period unless they elect otherwise. The amount attributable to Roth contributions will not be subject to income tax since it has already been taxed to the individual. Is the amount of the hardship withdrawal or distribution subject to the 10% early withdrawal penalty if the individual is under the age of 59 ½? Yes, unless the individual satisfies one of the statutory exceptions **. Yes, unless the individual satisfies one of the statutory exceptions **. No. Please refer to IRS Form 8915B (Qualified 2017 Disaster Retirement Plan Distributions and Repayments) and the corresponding instructions for further information on the IRS website at Please note that IRS Form 8915B had not been finalized as of the date that this table was prepared. Can the amount of the distribution be grossed up for income taxes and penalties? Yes Yes Yes, however the reduced tax rates and penalty waiver should be fully considered. The total amount of distribution, including tax gross up, cannot exceed the lifetime $100,000 limit 13

14 , Hurricane & California Wildfires Distributions, & Recontribution of Prior Distributions Can a participant who obtained a hardship withdrawal for the purchase of a principal residence before the hurricane or CA Wildfires but was unable to use it recontribute it to an eligible retirement plan? N/A N/A Yes, a participant who obtained a hardship withdrawal from a 401(k) or 403(b) plan, or a first home purchase withdrawal from an IRA during the period February 28, 2017 and September 21, 2017 for the purchase of a principal residence that was located in the hurricane-designated disaster area, or during the period March 31, 2017 through January 15, 2018 in a wildfire designated area, but was unable to use the proceeds because of the disaster may recontribute it to an eligible retirement plan (IRA, individual retirement annuity, qualified retirement plan, 403(b) annuity contract, and a governmental 457(b) plan). Any such recontribution must be made to a 401(k) or 403(b) plan, or IRA on or after August 23, 2017 and before February 28, 2018 for a hurricane, and on or after October 8, 2017 and on or before June 30, 2018 for California Wildfires, will be treated as a rollover contribution. 14

15 , Hurricane & California Wildfires Distributions, & Can a participant who received a Disaster Distribution recontribute it to an eligible retirement plan? N/A Yes, a participant who received a Disaster Distribution which would have qualified as an eligible rollover distribution may recontribute it to an eligible retirement plan (IRA, individual retirement annuity, qualified retirement plan, 403(b) annuity contract, and a governmental 457(b) plan). The recontribution will be treated as a rollover contribution. Any such recontribution must be made within a three year beginning on the date after receipt of the distribution. Any such repayment will be treated as a rollover contribution and cannot exceed the amount of the original distribution. 15

16 , Hurricane & California Wildfires Distributions, & Plan Procedures and Document Amendments Does a plan sponsor have to follow the plan s procedural requirements? Yes No, a plan will not be treated as failing to follow procedural requirements imposed by the terms of the plan merely because those requirements are disregarded for any period beginning on or after the date of the hurricane and continuing through January 31, 2018 for Hurricane Harvey and Irma, and through March 15, 2018 for Hurricane Maria and the California Wildfires. For example, a plan does not have to impose a minimum amount that must be distributed or a limit on the number of Hurricane Harvey, Irma and Maria hardship withdrawals. However, the plan administrator must make a goodfaith effort under the circumstances to comply with the requirements. Fidelity will update the Plan Administration Manual for plan sponsors with individually designed plan documents and other plan sponsors that use a Plan Administration Manual. This was not addressed by the Act or Budget Act. They do not require a plan to impose a minimum amount that must be distributed or a limit on the number of distributions. However, a plan sponsor may impose a minimum amount or a limit on the number of distributions. The plan sponsor may want to establish different procedural requirements for Disaster Distributions. Fidelity will update the Plan Administration Manual for plan sponsors with individually designed plan documents and other plan sponsors that use a Plan Administration Manual. 16

17 , Hurricane & California Wildfires Distributions, & Can a plan administrator rely on employee representations that he or she is eligible for a distribution? Yes, in some cases, a plan administrator may rely on an employee's representation (made in writing or such other form as may be prescribed by the Commissioner), unless the plan administrator has actual knowledge to the contrary. However, some plans require participants to provide documentation as well. Yes, a plan administrator may rely on an employee s reasonable representations that he/she is an eligible individual and qualifies for the of Hurricane Harvey, Irma and Maria hardship withdrawals unless the plan administrator has actual knowledge to the contrary. A plan administrator may rely on a participant s reasonable representation that he or she is a qualified individual unless they have actual knowledge to the contrary. However, there is no need to provide proof of economic loss to the plan administrator. May a plan sponsor offer this type of hardship withdrawal or distribution to eligible individuals before the plan document is amended to include this provision? No Yes Yes 17

18 , Hurricane & California Wildfires Distributions, & Is a retroactive plan document amendment required? N/A CA Yes, the plan document must be amended by the last day of the plan year that begins in 2018 if the plan does not include a participant distribution provision. Otherwise the plan document does not need to be amended to comply with the relief included in the IRS guidance. Yes, the plan document must be amended by the last day of the plan year that begins in Fidelity will be drafting a good faith amendment for distribution to plan sponsors that are using the Fidelity Volume Submitter Plan Documents (both 401(a)/(k) and 403(b)). In addition, plan sponsors should contact their Fidelity representative to determine if any changes need to be made to other Fidelity agreements.. Working with Fidelity on plan operation and administration How do I set up these distributions for my plan? Please contact your Fidelity representative for further information. A plan sponsor must complete and sign an election form to establish these hardship withdrawals on Fidelity s systems. Please contact your Fidelity representative for further information. A plan sponsor must complete and sign an election form to establish the Disaster Distributions on Fidelity s systems. We anticipate that this form will be available in early November Please contact your Fidelity representative for further information. # The Act originally did not currently include any tax relief for individuals who were affected by the California Wildfires. However, President Trump signed the Bipartisan Budget Act of 2018 ( Budget Act ) on February 9, 2018, which included similar tax relief for individuals who were affected by certain California wildfires. 18

19 ** The 10% additional income tax does not apply to the following plan payments: Payments made after a participant separates from service after age 55 in the year of the separation Payments that start after separation from service if they are paid at least annually in equal or close to equal amounts over the individuals life or life expectancy (or the lives or joint life expectancy of individual and his/her beneficiary) Payments from a governmental defined benefit pension plan made after the participant separates from service if he/she is a public safety employee and at least age 50 in the year of the separation. Payments made due to the participant s disability Payments made due to the participant s death Payments of ESOP dividends Corrective distributions of contributions that exceed tax law limitations Cost of life insurance paid by the plan Payments made directly to the government to satisfy a federal tax levy Payments made under a qualified domestic relations order Payments up to the amount of a participant s deductible medical expenses Certain payments made while a participant is on active duty if he/she was a member of a reserve component called to duty after September 11, 2001 for more than 179 days Payments of certain automatic enrollment contributions requested to be withdrawn within 90 days of the first contribution Distributions from governmental section 457(b) plans Note 1: Hurricane Maria had a devastating impact on Puerto Rico and many Puerto Rico residents were significantly impacted. The Internal Revenue Service (IRS) provided relief for qualified individuals in retirement plans that were U.S. qualified plans through Announcement In addition, the Puerto Rico Hacienda issued Administrative Determination No ( AD ) and Administrative Determination No ( AD ) that provided for additional relief for affected individuals in dual qualified U. S. Internal Revenue Code and Puerto Rico Internal Revenue Code retirement plans, and Puerto Rico only qualified retirement plans. However, the Hacienda s provisions are permissive and plan sponsors do not have to offer the additional relief for participant loans and eligible distributions. The information in the table does not include the provisions of AD and AD since there is a separate summary of those key provisions. Click the link here for further information (insert link here.) Note 2: This document was created by Fidelity as an informational resource for plan sponsors, based on published guidance and informal comments made by the IRS, and highlights portions of the IRS Guidance and Act. Therefore, it is subject to change, if and when additional guidance is provided. 19

20 Fidelity Investments does not provide tax or legal advice. Nothing herein should be construed, or relied upon, as tax or legal advice. We recommend that a plan sponsor seek the advice and assistance of legal counsel to determine how this should apply to its plan. For plan sponsor use only. Fidelity Investments Institutional Operations Company, Inc., 245 Summer St, Boston, MA FMR LLC