Regulators Provide Relief for Hurricane Harvey Victims

The IRS is loosening hardship withdrawal and loan rules, and the DOL announced postponed deadlines for Form 5500 filing, among other things.

The Internal Revenue Service (IRS) announced that defined contribution (DC) employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Harvey and members of their families.

Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though individual retirement account (IRA) participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

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Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster area localities affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, parts of Texas qualify for individual assistance. For a complete list of eligible counties, visit https://www.fema.gov/disasters. To qualify for this relief, hardship withdrawals must be made by January 31, 2018.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a victim of Hurricane Harvey to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in Announcement 2017-11.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged.

Relief from the DOL

In addition, the Department of Labor (DOL) says it is working with the IRS to provide relief regarding certain verification procedures that may be required under retirement plans with respect to plan loans to participants and beneficiaries, hardship distributions and other pension benefit distributions.

The Department also says it recognizes that some employers and service providers acting on employers’ behalf, such as payroll processing services, located in identified covered disaster areas will not be able to forward participant payments and withholdings to employee benefit plans within the prescribed timeframe. In such instances, the Department will not—solely on the basis of a failure attributable to Hurricane Harvey—seek to enforce the provisions of Title I of the Employee Retirement Income Security Act (ERISA) with respect to a temporary delay in the forwarding of such payments or contributions to an employee pension benefit plan to the extent that affected employers, and service providers, act reasonably, prudently and in the interest of employees to comply as soon as practical under the circumstances.

The DOL relaxed deadlines for filers of Form 5500s. This relief is in addition to Form 5500 Annual Return/Report filing relief already provided by the IRS. Form 5500 series returns that were required to be filed on or after August 23, 2017, and before January 31, 2018, have until January 31, 2018 to file.

In general, ERISA provides that the administrator of an individual account plan is required to provide 30 days advance notice to participants and beneficiaries whose rights under the plan will be temporarily suspended, limited or restricted by a blackout period. The regulations 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 fiduciary so determines in writing. The DOL says natural disasters, by definition, are beyond the control of a plan administrator. With respect to blackout periods related to Hurricane Harvey, the department will not allege a violation of the blackout notice requirements solely on the basis that a fiduciary did not make the required written determination.

Finally, the DOL says it recognizes that plan participants and beneficiaries may encounter an array of problems due to the hurricane, such as difficulties meeting certain deadlines for filing health benefit claims and COBRA elections. The guiding principle for plans must be to act reasonably, prudently and in the interest of the workers and their families who rely on their health plans for their physical and economic well-being. Plan fiduciaries should make reasonable accommodations to prevent the loss of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established timeframes.

In addition, the department acknowledges that there may be instances when full and timely compliance by group health plans and issuers may not be possible. It says its approach to enforcement will be marked by an emphasis on compliance assistance and include grace periods and other relief where appropriate, including when physical disruption to a plan or service provider’s principal place of business makes compliance with pre-established timeframes for certain claims’ decisions or disclosures impossible.

DC Investors Stayed the Course in Q1 2017

Amid strong market returns in Q1 2017, most participants left asset allocations in DC plans unchanged, according to a new report by the ICI.

Nearly all active defined contribution (DC) plan participants continued investing in their accounts during the first quarter of 2017, according to recordkeeping data gathered by the Investment Company Institute (ICI).

The ICI analysis finds only 1.1% of DC plan participants stopped contributing during this period.

Moreover, asset-allocation shifts and withdrawal activity remained low during this time frame. According to the ICI, 4.6% of DC plan participants changed the asset allocation of their account balances, and 3.8% changed the asset allocation of their contributions.

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The ICI points out that during the first quarter of the year, stock prices generally rose. On net, the S&P 500 total return index was up 6.1%.

In the first quarter of 2017, 1.3% of DC plan participants took withdrawals. The rate was about the same as it was during the first quarter of 2016. Levels of hardship withdrawals were also low, with only 0.4% of DC plan participants making them during this time period. The same share made hardship withdrawals in the first quarter of 2016.

Loan activity also slightly ticked down. At the end of March 2017, 16.6% of DC plan participants had loans outstanding, compared with 17.0% at the end of 2016. The ICI notes the trend follows a seasonal pattern observed during the last several years.

The ICI notes, “Two factors appear to influence DC plan participants’ loan activity: reaction to financial stresses and a seasonal pattern. Likely responding to financial stresses, the percentage of DC plan participants with loans outstanding rose from the end of 2008 (15.3%) through 2011 (18.5%). This pattern of activity is similar to that observed in the wake of the bear market and recession earlier in the decade … Loan activity appears to have a quarterly seasonal pattern: the first quarter of the year tends to have lower percentages of DC plan participants with loans outstanding compared with later quarters.”

Overall, the study finds that 28% of U.S. retirement assets were DC plan assets.

This data comes from the ICI’s “Defined Contribution Plan Participants’ Activities, First Quarter 2017,” report. The study tracks contributions, withdrawals, and other activity based on DC plan recordkeeper data covering more than 30 million participant accounts in employer-based DC plans. The full report can be accessed at ici.org.

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