Hurricanes
Katrina And Rita Generate A Storm Of Relief
For Employee Benefit Plan Sponsors, Participants And Beneficiaries
Faced with some of the worst natural disasters in our country’s history, Congress and governmental agencies struggle to find ways to reduce the toll of human suffering. Only a small part of the offered relief relates to employee benefit plans. Even so, the effect on employee benefit plan sponsors, participants and beneficiaries is substantial. This article summarizes recent regulatory and legislative Hurricane Katrina and Rita relief relating to employee benefit plans. Primarily, the relief discussed below affects plan sponsors, participants, and plans located directly in the Hurricane Katrina and Rita disaster areas. However, some relief extends to participants who have certain relatives who are directly affected by the Hurricane Katrina.
KATRINA EMERGENCY TAX RELIEF ACT OF 2005
The Katrina Emergency Tax Relief Act of 2005 (KETRA), which
was enacted on
No Penalty for Early Qualified Hurricane Katrina
Distributions
Notwithstanding the rules that would otherwise apply to
401(k) and other retirement plans, a “qualified Hurricane Katrina distribution”
may be made to a participant without jeopardizing the tax-qualified status of
the plan, and without exposing the participant to a 10% additional income
tax. A “qualified Hurricane Katrina
distribution” is any distribution from an eligible retirement plan made on or
after August 25, 2005, and before January 1, 2007, to an individual whose
principal place of abode on August 25, 2005, is located in the Hurricane
Katrina disaster area, and who has sustained an economic loss by reason of
Hurricane Katrina. The aggregate amount
that may be treated as a qualified Hurricane Katrina distribution cannot exceed
$100,000. The Hurricane Katrina disaster
area is defined as an area declared by the President as a major disaster area
before
Tax-Free Repayment of Qualified Hurricane Katrina
Distributions Permitted
Any individual who receives a qualified Hurricane Katrina distribution may, at any time within three years of the date the distribution is received, make one or more contributions (not to exceed the amount of the distribution) to any eligible retirement plan in which he or she is a participant. Provided the plan to which such contributions are made is qualified to receive “rollover” contributions, the contributions are treated as tax-free rollovers. If the amounts received in a qualified Hurricane Katrina distribution are not “rolled over,” they become taxable. However, the amount required to be included in gross income may be spread evenly over three years (unless the individual opts out of this special treatment).
Special Plan Loan
Provisions
The maximum amount that may be borrowed by a hurricane victim between September 23, 2005, and before January 1, 2007, is increased from $50,000 to $100,000. Furthermore, the normal statutory requirement, limiting loans to no more than one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan, is waived.
Also, if the due date for any repayment with respect to a plan loan occurs during the period beginning on August 25, 2005, and ending on December 31, 2006, the due date may be delayed for one year. All subsequent repayments and interest must be adjusted accordingly. The usual five-year maximum term for the loan may be extended as necessary to accommodate the one-year repayment extension.
Plan Amendments
Provided qualified plans are operated in accordance with KETRA, any necessary conforming plan amendments to non-governmental plans may be delayed until no later than the last day of the first plan year beginning on or after January 1, 2007, or such later date as the Secretary of the Treasury may prescribe. The date by which governmental plans must be amended is two years after the date applicable to non-governmental plans.
OTHER SPECIAL RULES APPLICABLE TO LOANS AND HARDSHIP DISTRIBUTIONS
In Announcement 2005-70, the IRS said that a qualified employer plan will not be treated as failing to satisfy any requirement under the Internal Revenue Code (“Code”) or regulations merely because the plan makes a loan or a hardship distribution for a need arising from Hurricane Katrina. The loan or hardship distribution may be made to any employee or former employee whose principal residence or place of employment on August 29, 2005, was located in one of the counties or parishes in Louisiana, Mississippi or Alabama that were designated as disaster areas eligible for Individual Assistance by the Federal Emergency Management Agency (FEMA). Such loans and hardship distributions may also be made to any employee or former employee whose lineal ascendant or descendant, dependent or spouse had a principal residence or place of employment in one of these devastated areas on such date. A “qualified employer plan,” for this purpose, includes a plan meeting the requirements of Code Section 401(a), 403(a), or 403(b), and any plan described in Code Section 457(b) maintained by a governmental employer described in Code Section 457(e)(1)(A).
Plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution, unless the plan administrator has actual knowledge to the contrary. The distribution may be made to address any hardship of the employee, not just the types enumerated in the regulations, and no post-distribution contribution restrictions are required. However, this hardship distribution relief applies only to hardship distributions made on account of Hurricane Katrina on or after August 29, 2005, and no later than March 31, 2006.
EXTENSION OF CERTAIN COMPLIANCE TIME FRAMES APPLICABLE TO GROUP HEALTH PLANS
Health plan administration is subject to many stringent compliance dates. The Department of Labor’s Employee Benefits Security Administration (EBSA), in concert with the Internal Revenue Service, recognizing the challenges faced by participants, beneficiaries and plan sponsors affected by Hurricane Katrina, provided that the following time frames shall be tolled with respect to such persons for the period between August 29, 2005, and February 28, 2006 (for timeframes mandated by the Code) or January 3, 2006 (for dates mandated by ERISA):
(1) The time period (normally 63 days) during which an individual can go without group health plan coverage before his rights to credit for prior coverage under the Health Insurance Portability and Accountability Act (HIPAA) are lost;
(2) The 30-day period under HIPAA to secure creditable coverage without pre-existing condition exclusion for certain children;
(3) The time within which to exercise HIPAA special enrollment rights in a group health plan, such as where other coverage is lost (normally within 30 days of the loss);
(4) The time within which to elect COBRA continuation coverage (normally 60 days);
(5) The time within which to make premium payments for COBRA continuation coverage;
(6) The date by which an individual must notify the plan of a “qualifying event” or determination of disability;
(7) The time frames relating to claim procedures for the determination and appeal of benefit claims; and
(8) The dates by which certain notices must be provided in connection with HIPAA portability and COBRA continuation rights.
Please note that the
DOL is expected to issue guidance that will extend the dates to
RELIEF WITH RESPECT TO MINIMUM FUNDING STANDARDS
Pension plans affected by Hurricane Katrina and subject to minimum funding requirements have been granted limited relief through a joint effort of the Internal Revenue Service, the Department of Labor’s Employee Benefits Security Administration (EBSA) and the Pension Benefit Guaranty Corporation (PBGC). In IRS Notice 2005-60, the Service announced that for any plan affected by Katrina any minimum contributions due between August 29, 2005, and October 30, 2005, such contributions may be postponed until October 31, 2005. Furthermore, if a pension plan sponsor wishes to seek a waiver from the minimum contribution requirements, and the due date for the application for the waiver falls within the period beginning on August 29, 2005, and ending on October 30, 2005, such waiver application may be postponed until October 31, 2005.
EXTENSION OF FORM 5500 FILING DUE DATES FOR AFFECTED PLANS
Consistent with Internal Revenue Service pronouncements, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) announced on September 28, 2005, that it would extend the due date for Form 5500 Annual Report filings for employee benefit plans affected by Hurricane Rita. Under this relief, Form 5500 series filings required to be filed between September 23, 2005 and February 28, 2006, are granted an extension until February 28, 2006. Plan filers entitled to the extension should check Part I, Box D, on the Form 5500 or Part 1 on Form 5500 EZ and attach a statement to the form in accordance with the instructions.
The due date for Form 5500 filings for plans affected by Hurricane Katrina were also further extended. On September 20, 2005, consistent with IRS pronouncements, EBSA announced a Form 5500 due date extension for plans affected by Hurricane Katrina. Filings due between August 29, 2005, and February 28, 2006, were granted an extension until February 28, 2006.
The extensions apply to plan administrators, employers and other entities in the areas directly affected by the hurricanes, as identified by the Federal Emergency Management Agency (FEMA). The extension also applies to firms located outside the affected areas who are unable to obtain the necessary information from service providers, banks or insurance companies whose operations were directly affected by the hurricanes.
RELIEF FROM PBGC FILING DEADLINES
Similar to the relief granted with respect to Form 5500 filing deadlines, the Pension Benefit Guaranty Corporation (PBGC) extended its deadlines for certain filings by affected plans otherwise due between August 29, 2005, and January 3, 2006. The extension applies to PBGC premium payments, single-employer plan termination filings, required participant notices, reportable event notices, Annual Financial and Actuarial Information Reporting, requests for reconsideration and appeals, and other PBGC‑required filings. Other filings may be postponed, but will need to be decided on a case-by-case basis.
If you have any questions regarding Hurricane Katrina and
Rita relief relating to employee benefit plans or other questions affecting
your organization, please contact your Ice
Miller employee benefits attorney or Melissa P.
Reese, Tiffany
A. Sharpley, or Jim Kemper.
This publication is intended
for general information purposes only and does not and is not intended to
constitute legal advice. The reader must consult with legal counsel to
determine how laws or decisions discussed herein apply to the reader's specific
circumstances.
©2005 Ice Miller