MassMutual s Regulatory Advisory Services Congress Provides Additional Relief for Victims of Hurricanes Harvey, Irma and Maria

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1 MassMutual s Regulatory Advisory Services Congress Provides Additional Relief for Victims of Hurricanes Harvey, Irma and Maria Hurricane Withdrawals, Extended Loan Repayment Periods, and Staggered Taxable Income Inclusion Introduction On September 29 Congress passed (and President Trump signed) special disaster relief for victims of Hurricanes Harvey, Irma and Maria which came in the form of special tax provisions that create several retirement plan withdrawal and loan transactions that aim to loosen the grip of these disasters over affected plan participants and their families. In the short term, this withdrawal relief will ensure a significantly easier access to retirement funds, with much less of an impact to the participant s immediate tax liability, and without premature distribution tax penalties in certain instances. In addition, the relief provides several ways to expand the period over which plan participant loans can be repaid, certain withdrawals can be rolled back into a plan or IRA, and amendments can be made immediately effective but with delayed adoption dates. These and other forms of the legislative relief will be covered in this white paper. Plans affected include 401(a) plans, 401(k) plans, 403(b) plans as well as state and municipal employees covered by 457(b) deferred compensation plans, and in some cases, IRAs. FOR PLAN SPONSOR USE ONLY Massachusetts Mutual Life Insurance Company, Springfield, MA All rights reserved. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) [of which Retirement Services is a division] and its affiliated companies and sales representatives. RS4153c 316 C: EXP 2/01/19

2 What Does the Relief Consist of and Who Does the Relief Benefit? The following chart depicts the types of relief available as a result of the Disaster Tax Relief and Airport and Airway Extension Act of The left hand column of the Table of Tax Relief for Hurricanes Harvey, Irma and Maria lists the various forms of tax relief and a description of might be impacted. The middle column provides a brief discussion of the usual restrictions associated with the transactions without the relief. The last column describes the elements and effects of the various relief provisions. For purposes of this relief, a Hurricane Harvey Disaster Area is an area with respect to which a major disaster has been declared by the President before September 21, 2017 under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Harvey. Similarly, the Hurricane Irma Disaster Area and the Hurricane Maria Disaster Area are the areas declared by reason of Hurricane Irma and Hurricane Maria, respectively. Table of Tax Relief for Hurricanes Harvey, Irma, and Maria Qualified Hurricane Distributions The distribution must meet one of the following requirements for eligibility: For Hurricane Harvey, the distribution must be made on or after August 23, 2017 (the qualified beginning date ) and before January 1, 2019 to an individual whose principal place of abode on August 23, 2017 is located in the Hurricane Disaster area and who has sustained an economic loss by reason of Hurricane Harvey. For Hurricane Irma, the distribution must be made on or after September 4, 2017 (the qualified beginning date) and before January 1, 2019 to an individual whose principal place of abode on September 4, 2017 is located in the Hurricane Irma disaster area and who has sustained an economic loss by reason of Generally a withdrawal is subject to a premature distribution penalty if the participant is under the age of 59 ½ (there are several exceptions), and withdrawals are also subject to mandatory federal tax withholding at a 20% rate. In addition, withdrawals need to be either transferred directly or rolled over within 60 days of receipt to an eligible retirement plan to avoid current taxation. Income tax on distributions is generally assessed on the basis of a tax year (the year of receipt), which for individuals is generally the calendar year. Eligible participants can withdraw up to $100,000 without a premature distribution penalty (the $100,000 limit is aggregated across all plans of the employer on a control group basis). Up to the amount withdrawn (but not more than $100,000) can be recontributed as a qualified rollover at any time during the 3-year period beginning on the day after the date the distribution was received. Under the relief provisions, for most purposes this recontribution is treated as an eligible rollover except that it is not subject to mandatory tax withholding requirements. The recontribution can be made to a qualified plan or to an IRA or the individual. Distribution income is included in the individual s tax liability ratably over a 3-year period unless the 2

3 Hurricane Irma. For Hurricane Maria, the distribution must be made on or after September 16, 2017 (the qualified beginning date) and before January 1, 2019 to an individual whose principal place of abode on September 16, 2017 is located in the Hurricane Maria disaster area and who has sustained an economic loss by reason of Hurricane Maria. recipient elects not to apply this aspect of the relief. Relief for Distributions Intended to be Used to Construct or Purchase a Principal Residence This relief is available to individuals who received qualified distributions after February 28, 2017 which were to be used to purchase or construct a principal residence in the Hurricane Harvey, Hurricane Irma, or Hurricane Maria disaster areas but which construction or purchase was not performed on account of one of those storms. For these purposes, a qualified distribution is a qualified financial hardship distribution from 401(k) or 403(b) accounts which were intended to purchase or construct a principal residence, or, or IRAs, a qualified first time home buyer distribution under Section 72(t)(2)(f). Withdrawals made for home purchases or construction are generally spent with no opportunity to return the funds to the retirement plan. An individual who received a qualified distribution may make one or more contributions, not to exceed the amount of qualified distributions received, to an eligible retirement plan provided the rollover could otherwise be made (under Sections 402(c), 403(a)(4), 403(b)(8), or 403(d)(3)). These repayments must be made by February 28, For purposes of the withholding rules and rollover rules, these distributions will be treated the same as qualified hurricane distributions (not subject to mandatory withholding and treated as an eligible rollover. 3

4 Participant Loans Relief For eligibility purposes, a qualified individual is the same as individual for the qualified hurricane distributions relief cited above for Hurricane Harvey, Hurricane Irma, and Hurricane Maria. Loans are generally limited to a total accumulated outstanding loan balance of $50,000 reduced by the difference between the highest outstanding balance of loans in the previous year and the outstanding balance of loans on the date of the new loan. Loans are also limited to one-half of the vested account balance. Between the date of enactment and December 31, 2018, the limit on participant loans (in the aggregate) will be the lesser of $100,000 or 100% of the vested account value. A penalty-free delay of loan repayments is offered under the relief to a qualified individual with an outstanding loan on or after the qualified beginning date (see the list of qualified beginning dates under Qualified Hurricane Distribution Relief, above). More specifically, if the due date for the payment occurs during the period beginning on the qualified beginning date and ending on December 31, 2018, the due date is delayed one year. Nonetheless, interest will accrue on the late payments. The permitted delay period for repayments will be ignored for purposes of determining whether a loan which was not used for the purpose of purchasing a principal residence must mature no later than 5 years after the loan has been made. Plan Amendments Relief Discretionary amendments are generally adopted by the end of the year they are put into effect. In general, any plan that follows the amendment relief provided in the new legislation (described below) will be treated as operating within the terms of the plan during the relief period defined in the act, 4

5 provided the plan is operated as if the amendment were in effect and the plan is timely amended. Amendments must be made on or before the last day of the first plan year beginning on or after January 1, 2019 (unless the Secretary of Treasury prescribes a later date). Governmental plans, however, have two more years later than this date in which to amend their plans. Next steps: Plan Sponsors should review the relief provisions to determine what options for relief make sense for their plans and participants. Employer plans do not necessarily need to offer qualified hurricane distributions or more liberal loan provisions. Plan Sponsors should also discuss these provisions with their own legal advisors. MassMutual has implemented processes that reflect this limited guidance. Should additional guidance be released, we will review and update as needed. MassMutual Regulatory Advisory Services If you have questions about the information in this white paper or wondering what your next steps might be with respect to this white paper regarding the Congressional relief that provides additional relief for victims of Hurricanes Harvey, Irma and Maria, please contact your MassMutual representative. This document is for informational purposes only and should not be construed as legal and/or tax advice. Please consult with your own legal counsel and other experienced advisors regarding the application of the matters described herein to your specific circumstances. 5