Hurricane Harvey Relief IRS and DOL Guidance

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1 Retirement & Investment Legal Consulting & Compliance Hurricane Harvey Relief IRS and DOL Guidance On Wednesday, August 30, the Internal Revenue Service (IRS) released Announcement The Announcement provides plan sponsors the ability to allow qualifying individuals to utilize certain of their retirement assets in qualified employer plans to alleviate hardships caused by Hurricane Harvey. This relief is in addition to the general relief announced by the IRS under the IRS News Release (IR ) (relating to IRS authority to delay certain deadlines under section 7508A of the Internal Revenue Code). These IRS relief provisions are generally similar to prior disaster relief efforts such as those issued after Hurricane Katrina, Superstorm Sandy, and the severe flooding in Louisiana in Also on August 30, the Department of Labor (DOL) issued News Release NAT which provides compliance guidance for retirement plans with administrative procedures and processes which may have been disrupted by Hurricane Harvey. (The DOL also issued FAQs for Participants and Beneficiaries Following Hurricane Harvey.) Much of the DOL relief comes in the form of a general position on delayed, limited, or non-enforcement for certain compliance failures attributable to Hurricane Harvey. Summary IRS Relief The following is a summary of the optional relief provisions included in the IRS Announcement. Relief Provided Plan provision relief Distributions are allowed from eligible plans that do not currently provide for loans or hardship distributions or distributions for unforeseeable emergencies. Relief from 6-month contribution restriction Documentation relief Qualifying individuals are permitted to use the hardship distributions and loans for any hardship arising from Hurricane Harvey. For example, a plan may currently allow for a hardship distribution, but only for safe-harbor reasons (e.g., expenses to repair damage to the employee s principal residence). The new relief will permit a plan to allow a hardship distribution for other reasons (e.g., to replace a car that was ruined by the flooding due to Hurricane Harvey, food, or shelter), provided the amount distributed does not exceed the amount of the hardship. Hardship restrictions under a 401(k) or 403(b) plan which normally prohibit participants from making plan contributions for six months are lifted for hardship distributions made pursuant to this relief. The relief relaxes the documentation and procedural rules that typically apply for the making of loans or hardship distributions. Under this new relief, a plan administrator may make hardship distributions and loans without first gathering all the necessary documentation that is otherwise required under plan rules, provided the plan administrator makes a reasonable and timely effort to obtain required documentation after the distribution or loan is made. For example, if spousal consent is required for a loan and the employee claims his 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 after the loan is made. Risk. Reinsurance. Human Resources.

2 Documentation relief (continued) What's Not Changing Taxation and withholding Plans also may rely upon a qualifying individual s representation with respect to the need for, and amount of, a hardship distribution as long as the plan administrator does not know that the qualifying individual s representations are false. Taxable distributions will be subject to normal taxation and withholding requirements, including the 10% tax on early distributions. Spousal consent If a plan requires spousal consent before a distribution or loan can be made, then spousal consent will apply to any hardship distribution or loan made under this relief. Maximum dollar limits The legal maximum dollar limits applicable to plan loans and hardship distributions continue to apply. Ineligible assets This relief does not apply to qualified nonelective employer contributions (QNECs) or qualified matching employer contributions (QMACs) or to earnings on elective contributions. No relief for existing plan loans Where It Can be Used Qualifying individuals with outstanding plan loans must continue loan repayment. No relief was granted for existing plan loans (e.g., maximum repayment period was not extended, $50,000 loan limit was not waived). Eligible plans Defined contribution-type plans (e.g., 401(k) and 403(b) plans): The relief applies to loans or hardship distributions. Qualifying individuals 457(b) plans sponsored by state and local governments or tax-exempt organizations: The relief applies to distributions for unforeseeable emergencies. Defined benefit and money purchase plans: Although hardship distributions are not generally available from a defined benefit or money purchase plan, the relief allows such distributions if the plan has separate accounts attributable to employee contributions or rollover amounts. Current and former employees are eligible if they or their direct lineal ascendants or descendants (e.g., close family members, such as spouses, parents, grandparents, children or grandchildren) worked in or had their primary residence on August 23, 2017 in one of the Texas counties identified for individual assistance by the Federal Emergency Management Agency (FEMA) because of the devastation caused by Hurricane Harvey. Additional areas in Texas or other states identified by FEMA for individual assistance because of damage related to Hurricane Harvey are included for the relief from the date FEMA specifies as the beginning of the incident period, and that date should be substituted for references to August 23, While a former employee is eligible for the relief, he or she may also generally be entitled to a distribution of his or her plan account balance due to his or her termination of employment. Thus a plan may offer this relief to only current employees, but raise awareness with former employees of their right to distributions of their plan account balances. Hurricane Harvey Relief IRS and DOL Guidance 2

3 Adoption Considerations Optional Plan sponsors may elect to use this relief in whole or in part; it is not required. Timing The relief may be applied to hardship distributions and loans made to qualifying individuals during the period beginning on or after August 23, 2017 and ending January 31, Not all-or-nothing A decision to use the relief is not an all-or-nothing proposition. A plan sponsor may decide, for example, to expand hardship reasons to storm damage, but not change any other hardship processes or procedures. Plan amendment Plans taking advantage of this relief must be amended on or before the end of the first plan year beginning after December 31, 2017 (i.e., amendments must be adopted by December 31, 2018 for calendar year plans). Amendments are required if plan sponsors add loans or hardship distributions to their plans or change their current hardship reasons or loan coverage to allow for more liberal application of hardship and plan loan provisions relating to Hurricane Harvey. As long as this requirement is met, plans do not have to be amended before taking advantage of the relief. ERISA AND DOL Compliance The Announcement indicates that the Department of Labor has advised Treasury and the IRS that compliance with the provisions of the Announcement will not be treated as a violation of Title I of ERISA. Summary DOL Relief The following is a summary of the relief provisions included in the DOL News Release and the accompanying FAQs for Participants and Beneficiaries Following Hurricane Harvey. Relief Provided Verification procedures for plan loans and distributions Participant contributions and loan repayments The DOL is working with the IRS to provide relief with respect to verification procedures that may be required under retirement plans for plan loans, hardship distributions and other pension benefit distributions. It is expected that good faith practices that are satisfactory to the IRS under its relief will be satisfactory to the DOL. The general deadline for deposits of employee deferrals and loan repayments to retirement plans is as soon as the amounts can reasonably be segregated from the employer s general assets, but no later than the 15th business day of the month following the month in which the amounts were withheld or are paid to the employer. The DOL recognizes that some employers and service providers acting on employers behalf, such as payroll processing services, located in identified disaster areas will not be able to forward employee deferrals and participant loan repayments to plans within the prescribed timeframe. Hurricane Harvey Relief IRS and DOL Guidance 3

4 Participant contributions and loan repayments (continued) The DOL relief provides that, if a delay is due solely to the effects of Hurricane Harvey, enforcement action will not be taken if employers and service providers act reasonably, prudently, and in the interest of employees to comply as soon as practical under the circumstances. Blackout notices Under the blackout notice rules, a plan administrator is required to provide 30 days advance notice to participants and beneficiaries whose rights under an individual account retirement plan will be temporarily suspended, limited or restricted by a blackout period (i.e., a period of suspension, limitation or restriction of more than three consecutive business days on a participant s ability to direct investments, obtain loans or obtain other distributions from the plan). Payment of retirement benefits The blackout notice rules provide an exception to the advance notice requirement when the inability to provide the notice is due to events beyond the reasonable control of the plan administrator and a plan fiduciary makes a determination of such in writing. The relief notes that natural disasters, by definition, are beyond the control of the plan administrator. The DOL will not allege a violation of the blackout notice rules solely on the basis that a plan fiduciary affected by Hurricane Harvey failed to make the required written determination. The DOL relief recognizes that an employer s or the plan s record keeper s place of business may be closed by reason of Hurricane Harvey. To the extent that pension payments do not arrive on time, the DOL guidance suggests that participants reach out to employers, plan administrators, or other third parties to confirm the situation and possible steps to address payment. The DOL offers a contact number in the event these other alternatives do not prove helpful. The DOL guidance provides additional information of a more general nature regarding accessing plan accounts for distribution or investment purposes, possible tax consequences associated with certain distribution alternatives, and maintenance of any records relating to a participant s plan benefits. Actions Steps for Plan Sponsors Plan sponsors should consider what, if any, action is appropriate at this time, including: Since the IRS relief is optional, plan sponsors will need to decide whether to implement all or part of the relief. This could be influenced by the number of qualifying individuals that could be impacted by Hurricane Harvey and the resources that are currently available under the plan or through other programs. If a decision is to take advantage of the IRS relief: Contact service provider/recordkeeper to ascertain what administrative support will be available through January 31, 2018; Determine relief to be offered; and Hurricane Harvey Relief IRS and DOL Guidance 4

5 Raise awareness of eligibility for relief and relief provisions being offered through employee and plan communications, including leveraging web and based messaging for speedy (and lower cost) delivery and making sure local resources are aware of the new features. Whether or not IRS relief is adopted, it may make sense to review the current loan and hardship withdrawal provisions and determine if added flexibility is needed in the future to potentially alleviate the need for onetime relief: If not currently provided, consider adding loan and/or hardship withdrawal features. Consider offering loans and/or hardship withdrawal features to former employees. For former employees, raise awareness of eligibility for distributions from the plan on account of their termination of employment. Aon Hewitt consultants can help clients review plan features, understand service provider administrative solutions/options, and draft plan amendments (if necessary). If, on account of Hurricane Harvey, plan fiduciaries are unable to comply with the requirements of the Employee Retirement Income Security Act (ERISA), such fiduciaries should comply as soon as practical under the circumstances. About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative retirement, health, and talent solutions. We advise and design a wide range of solutions that enable our clients success. Our teams of experts help clients navigate the risks and opportunities to optimize financial security; redefine health solutions for greater choice, affordability, and wellbeing; and achieve sustainable growth by driving business performance through people performance. We serve more than 20,000 clients through our 15,000 professionals located in 50 countries around the world. For more information, please visit aon.com. About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance. For further information on our capabilities and to learn how we empower results for clients, please visit Hurricane Harvey Relief IRS and DOL Guidance 5