Retirement Plan and Leave Donation Programs During States of Emergencies

ERISA Employee Benefit Plan Litigation   |   Labor & Employment   |   Tax   |   September 13, 2017
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This article should interest employers offering retirement plan benefits or leave donation programs to employees affected by Hurricanes Harvey and Irma, in particular, and in various states of emergencies, in general. It focuses on the obligations of the plan sponsor and plan administrator[1] to operate employee benefit plans properly, even in times of emergency.

With respect to Hurricanes Harvey and Irma, this article is current through September 13, 2017, the date on which the IRS issued Announcement 2017-13. For updated information, we recommend the following webpages: and

Quick Takeaways

Employers can offer retirement plans and leave donation programs with features that allow access to retirement funds or paid time off to employees in need. These features can be added using standard plan operational procedures. While we can be grateful when the IRS offers “relief” from certain requirements under certain circumstances, plan sponsors must realize that, while this relief permits employers to roll out features more quickly, it may come with a potential cost of additional administrative requirements.

Distributions and Loans Without “Special Relief”

Occasionally, the IRS loosens employee benefit requirements to make it easier for those impacted by certain states of emergencies to access their retirement funds. This is a relatively recent occurrence, but for a long time, the federal government recognized that one way to encourage retirement plan participation is to give employees access to those funds prior to retirement. As such, retirement plan sponsors have several plan features they can implement to increase access to funds without any additional IRS guidance. For example:

  • 401(k) and 403(b) plans can permit in-service distributions to any participant over age 59-1/2;
  • profit sharing, 401(k), and 403(b) plans can allow a distribution of employer contributions at a younger age or after a certain number of years. For example, a profit sharing plan can allow access to any funds that have been accumulating for 2 or more years;
  • profit sharing, 401(k), and 403(b) plans can allow distributions at any age due to a hardship, and governmental and tax-exempt 457(b) plans can allow distributions at any age due to an unforeseeable emergency; and
  • 401(k), 403(b), defined benefit, money purchase pension, and governmental 457(b) plans may permit loans.

With any of the above, the plan sponsor is responsible for properly amending the plan before implementing the new plan feature, and for properly administering it. This includes notifying employees of the plan feature, obtaining the right information from participants seeking to access their funds, and properly addressing any tax withholding and reporting. In general, not only would the distribution options outlined above trigger taxation, but if the participant is younger than 59-1/2, a 10% early distribution penalty may apply. Properly-administered loans do not trigger taxation, but have more ongoing administration requirements.

A plan sponsor that wants to permit increased access to retirement plan funds because of a specific event, but does not want to allow this increased access indefinitely can use a concept sometimes referred to as an “amendment window” to restrict this level of access. This can be done by amending a retirement plan as one normally would, but providing for the amendment to no longer apply to distributions after a certain date. For example, a plan sponsor could amend its plan to provide for in-service distributions and loans that are taken during the 2017 and 2018 plan years. Under this amendment, new in-service distributions and loans would automatically be prohibited as of the 2019 plan year. The IRS used this concept, issuing relief for certain distributions and loans to those impacted by Hurricanes Harvey and Irma, but only if they are made through January 1, 2018.

Administering “Special Relief”

When the IRS eases restrictions on the access to retirement plan funds because of a temporary emergency, it often permits employers to amend plan procedures before amending plan documentation. For example, plan sponsors whose employees are affected by Hurricanes Harvey or Irma can allow loans or hardship distributions even if loans or hardship distributions are not currently permitted by the plan document. The loans or hardship distributions under this special procedure may only be issued to employees who live or work, or have children or other dependents who live or work, in a Hurricane Harvey or Irma disaster area. Plan sponsors using these procedures must amend their plan documents by December 31, 2018 for calendar-year plans (the end of the first plan year beginning after December 31, 2017). In this example, the IRS is allowing plan sponsors to implement this feature more quickly than the sponsor normally could, which can absolutely be an important benefit to participants, but not only must plan sponsors still amend the document and notify employees (the latter of which is often more difficult when the notice precedes the amendment), but the plan administrator’s obligations just increased. In addition to the standard requirements applicable to hardship distributions and loans, the plan administrator must also confirm the location of the affected individual’s residence or job location and confirm it matches the location guidelines put out by the federal government.

With Hurricanes Harvey and Irma, the IRS also reduced certain employer obligations to obtain information from a participant, allowing plan administrators to use “reasonable” methods. While this makes it potentially easier and quicker for participants who need to access retirement funds, the plan administrator must make additional “judgment calls” that may be questioned later and, in certain circumstances, must revisit the process to obtain any information that was previously permitted to be “skipped.” For example, if a distribution would normally require spousal consent, but under the circumstances the plan administrator approves the distribution without it, not only is there a risk that the administrator’s reasoning might be questioned, but the plan administrator is obligated to follow up later and obtain the consent.

The relief the IRS gives is not always consistent with what was provided previously, and is not always “relief” from all aspects one might expect. For example, there are many standard exceptions to the early distribution penalty, and one of those excludes “qualified hurricane distributions.” To be exempt from the 10% early distribution penalty, the distribution must be made to an individual described in IRS guidance on account of a hurricane identified in IRS guidance. As of September 13, 2017, not only has the IRS not included Hurricanes Harvey or Irma on this list, but the IRS noted that the tax treatment of loans and distributions, including the 10% penalty, remains unchanged.

Therefore, a plan sponsor who wants to use the IRS relief must review applicable guidance to determine what changes are permitted, what aspects remain unchanged, and what additional requirements will apply.

Leave Donation Programs

Employers can set up programs that let employees forgo some or all of their vacation time and either have that vacation time transferred to another employee, or have the value of that vacation time (normally the hours of vacation multiplied by the applicable pay rate) donated to charity. Unless the program is established to take advantage of certain exceptions, the employees donating their leave are taxed as if they received that benefit and then gifted it themselves. Presumably, employees who donate leave to charity can deduct that donation on their personal income tax return.

An employer can permit an employee to “donate” vacation time to another employee without the donating employee being taxed on it if the recipient has a “medical emergency” or was affected by a Presidentially-declared “major disaster” that requires the recipient to take additional time off from work. As of September 13, 2017, Hurricane Irma is a major disaster for individuals in certain parts of Florida, Puerto Rico, and the U.S. Virgin Islands, but not in Alabama or Georgia. Hurricane Harvey is a “major disaster” in parts of Texas, but not in Louisiana.

Under special IRS guidance, employers can allow employees to donate the value of unused leave to charitable organizations for relief to Hurricane (and Tropical Storm) Harvey victims without including those donated amounts in the donating employees’ taxable incomes. This IRS relief is only available for amounts transferred within the “window” from September 5, 2017 through January 1, 2019. This type of relief was also permitted for a limited time to help victims of Hurricanes Katrina, Sandy, and Matthew, and will probably be available for the victims of Hurricane Irma in the future. While this relief makes it easier for employees to make donations, the employer is responsible for selecting the appropriate charity and monitoring the timing of its donations.

Leave donation programs can be very helpful, and are available for employers to implement without any additional IRS guidance, but they must be drafted and operated carefully, as plan sponsors are at risk for failures to properly report, withhold, and remit income and employment taxes if these arrangements are not drafted and implemented properly.

We encourage plan sponsors to consider what employee benefit plans and plan features best suit employees, and to recognize that the answer to this question may change over time. Sponsors can revise plan provisions as necessary to address new circumstances, but it is important to recognize the impact this will have on plan administration so that the plan will continue to operate properly.

If you have any questions or would like more information about this topic, please contact the author or the Carlton Fields attorney with whom you normally communicate.

[1] “Plan sponsors” are entities that choose to offer benefits to individuals. Normally, this is the employer. “Plan administrators” are responsible for properly offering those benefits to individuals. Normally, this is also the employer, so we may use these terms interchangeably in this article.

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