Retirement Plan Relief for Victims of Hurricane Sandy

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Note - Any federal tax advice contained in this transcript is intended to apply to the specific situation described and should not be considered official guidance independent of the presentation. The tax advice and statements contained herein should not be relied upon for retirement planning purposes without first consulting a tax or retirement planning professional. This transcript has been edited for technical accuracy and may differ slightly from the audio recording of the Hurricane Sandy Relief  phone forum. This information is current as of December 11, 2012.  Since changes may have occurred, no guarantees are made concerning the technical accuracy after that date.

MO:  Hi, everyone. Again, I'm Mark O'Donnell, Director of IRS Employee Plans Customer Education and Outreach. Welcome to our phone forum on our Hurricane Sandy relief. Today we'll be hearing from Eric Slack, Acting Manager of Employee Plans Technical Guidance. Eric will discuss Announcement 2012-44 and the relief it provides for those affected by Hurricane Sandy. Before we start I'd like to point out a couple of things. Everyone registered for this forum will receive a certificate of completion by email in about a week, as long as you attend the entire live forum. Enrolled agents, enrolled retirement plan agents and enrolled actuaries are entitled to continuing education credits for this session. Other types of tax professionals should consult their licensing organization to see if today's session qualifies for continuing education credit. As with all our presentations, the comments expressed by our speakers should not be construed as formal guidance from the IRS. The comments expressed by our speakers should not be construed as formal guidance from the IRS.

For more information on Hurricane Sandy relief, visit our retirement plan's web site at www.irs.gov/retirement. That's www.irs.gov/retirement, and select "Hurricane Sandy Relief." While visiting our web site, I'd like to encourage you to check out our free online electronic newsletters. To subscribe, just select "Newsletters" on our landing page. There you can subscribe to future editions and browse past editions of the Retirement News for Employers, our newsletter for plan sponsors and their advisors, and Employee Plans News, which is directed at retirement plans professionals.

So without further delay, here's Eric Slack.

ES:  Thank you very much, Mark. One of the things I wanted to start out was, I'm the Acting Manager of Employee Plans Technical Guidance Group 1. I didn't want to do that, I didn't want to disabuse Mark of that until after I got the credit, you know, for being a much bigger shot than I really am. So I wanted to make sure that got on the table, but now I'll go ahead and correct it. But in any event I am with Employee Plans Technical Guidance and we did issue this guidance, and there is a number of questions that have come up. And so I think the format for today, what we'll try to do is everyone should have the PowerPoint presentation available; we'll kind of walk through that. Now, I think just by walking through that, we're going to answer a lot of questions that people have, and that, a lot of the question that we've, that have been submitted. We've had nearly a hundred questions, individual questions, submitted thus far, and I anticipate we'll receive even more as we go along. Hopefully I'm not raising new issues with our conversation here today, but in any event I'm happy to continue to answer some of these questions as they, as they come up. So we'll go through the PowerPoint and we'll discuss some of these aspects of the guidance and some of the things that ought to be kept in mind as you or these plan sponsors or employers begin to try to take advantage of the relief provided. Again, some of the questions will be answered. But in the event that they aren't', I've gone ahead and categorized the questions into about six boxes and six basic types of question. And we'll walk through those specifically and maybe give a little more, a more detailed, a little more rationale for, for some of, answers to some of these questions. So, but in any event, if the answers don't come through the PowerPoint discussion, or through the discussion of the six basic general questions at the end, feel free to contact Retirement Plans Questions at irs.gov, and keep those questions coming. We, you know, again, I, we're more than happy to get answers back, and if I see something, especially something that we haven't touched on here, we'll definitely look to get you an answer sooner rather than later. Definitely because of the situation that this guidance lends itself to.

So I'd like to add, on to the third slide of the PowerPoint, feel free to contact us with any questions that you have. If you felt that something was still unclear, let us know so we can get an answer out to you.

Announcement 2012-44, by now, I imagine most of you have, have parsed the language here and have tried to figure out how it's going to apply to your clients. And the basic, the basic gist of the announcement is that a qualified employer plan will not be treated as failing to satisfy any requirement under the Code of Regulations merely because the plan makes a loan or a hardship distribution for a needs, a need arising from Hurricane Sandy. Now, I think that on its own is probably fairly straightforward. I don't imagine too many people would have problems with that on its face, but it's once we dig down into the language a little bit that I think a lot of these questions start to emerge.

One of the first questions that always comes up is, well, what's, what do we consider, you know, damage relating to Hurricane Sandy. And the, that's why we've included the link there, irs.gov links regarding the, the counties that have been clared, declared federal disaster areas. And that's, that's basically your jumping off point. But it's, it's key to remember here that with respect to the participants taking these distributions or taking these loans, it's based on their principal residence or their principal place of employment. So, you know, so keep that in mind as you, as you go through the list of affected counties there.

Loans and distributions. One of the first things that tend to come in is, is, people don't understand exactly what type of relief is being granted with respect to the loans. There's nothing in the guidance that changes the terms of the plan. There's nothing there that says, you know, that you can all of a sudden give plan loans or hardship distributions in situations where they weren't otherwise allowable. All these plan loans and distributions are still subject to Section 72 of the Code. Loans and specific, specifically are covered by 72P. They're still going to have to comply there. It's also key to remember that revenue rulings and other guidance that's already out is, are going to, are going to be very useful here, and are going to do a lot to fill in some of the gaps that plan participants and plans themselves are seeing. One thing to remember is Revenue Procedure 2007-56, which helps out in the, in certain timing related issues before the IRS for federal, you know, federal disaster areas, Section 2 of that Rev Proc actually goes into, you know, the types of things that can be waived or mitigated in disaster-type situations. So if you don't see something here in this announcement it's key to remember that there may be other guidance out there. Some of the questions that we've received were relating to IRAs and the 60 day rollover period and whether or not that was, that was waived. Well, there is language on that in the Rev Proc 2007-56. Also Rev Proc 2003-16, which is the 60 day rollover revenue procedure, are going to be, are going to be necessary reading I think when you're trying to advice your clients, you know, so don't, this, you know, it's not, there's more guidance out there than just this announcement. It's important that you get a, get a complete picture there.

Another thing to remember is plans must have this language if they want to allow a loan or a distribution. Now, we will talk about this a little bit more. We've eased up some of the requirements with respect to documentation, we've eased up some of the requirements with respect to timing for these types of amendments. But at the end of the day, the amendments are going to have to be there. So that's, you know, that's something to keep in mind.

Relief. The first thing is obviously, you know, arising from Hurricane Sandy. What does that mean? Again, I don't think that we are going to get in there and, you know, really get into the weeds and say, well, this is arising out of Hurricane Sandy and this, and this isn't'. That's really a factual analysis that, that, from a guidance level I don't think we're, we're ready to, you know, to really delve into too deeply. But I think that the important to take away, as with most of the other forms of relief here, that it's a good faith determination. And, you know, I would think that something like, you know, a home being destroyed in Atlantic City on the beach is probably something that's going to be covered. You know, increasing gas prices for someone in Cleveland because of the increased demand in New Jersey, probably not. And so what we want to see is, you know, a good faith look at the situation when determining whether or not it's arising from Hurricane Sandy.

As I mentioned before, the principal residence or place of employment in an area covered by a disaster designation, you know, and that's – and again, these, these are probably straightforward for 99.99% of the cases, and so I think we want to avoid muddying the waters too much with this, you know, as far as, you know, whether or not the, we can always come up with some law school hypothetical, where someone, you know, creates a situation where they, they, they kind of straddle these lines. But you know again, a good faith interpretation of this, of the, of the principal residence or the, or the place of employment. And the, the people that are going to be looking at these, they don't want to ding you because you help some employee get, you know, relief following Hurricane Sandy. That's not what they want to do. That being said, you know, you need to make sure that you're doing whatever is reasonable under law to make sure that your Is are dotted and your Ts are crossed.

We had some of this come up with lineal ascendant or descendant. Obviously a parent, even if they're in Seattle, could, could help their child, a child help their parents, you know, in similar situations. That's not really an issue. One of the things that was, that was brought to my knowledge was someone talking about well what does, what does it mean to be a dependant? Well, you know, we don't, we don't define dependant. We're not, we're not going to get into the weeks, you know, with respect to who is a dependant and whether or not they have to be claimed as a dependant on tax deductions. That's, that's really kind of muddying up the water for a small number of people. And so those types of situations, you may have to follow up with us in greater detail. But you know lineal ascendant and descendant is, is, you know it's pretty broad but I mean I don't think that those are subject to any misinterpretation there.

Representations made by employees. Throughout the guidance we talk about whether or not representations made by the employees are sufficient, especially with regards to documentation. And they are, and we want that to serve as a baseline. We think that any time that an employee comes with their interpret--, you know, their, their documentation that they suffered X amount of damage or a certain type of damage, you know, following the hurricane, we don't, I don't think it's in anybody's best interest to really tie anybody's hands. So I think, you know, that's, that the best jumping off point. Now the situation comes up, well, you know, I've got employee X and Bob has always talked about buying his boats and he's got his dream boat and it's sitting in his office and it's, and he's got pictures of it everywhere and he talks constantly about buying his new boat, all the sudden, Hurricane Sandy strikes and he's, he's ready to go buy a boat but he says he needs it for, for Hurricane Sandy for a hardship withdrawal. Now if you know that he's not taking it out for, you know, Hurricane Sandy damage, then yeah, that's not, that's not reasonable, that's not a good faith approach to that. So, but again we're not going to get into the weeds of that.

Limitation. Because I mentioned earlier, a plan that's not permitted to make in-service distributions still can't, whether that's statutory or whether that's in the plan language, just because of this relief doesn't mean that all of a sudden a plan can make a loan, or a distribution. That being said, it's important to remember that we do give you increased time to make the amendment. So for certain plans they can obviously go ahead and make the loan immediately, or make the distrib--, the hardship distribution immediately, provided that they make the amendment within the specified time frame.

Another thing, I guess the, really the flip side to that is plans are not required to make loans or in-service distributions. This is, it's purely at the discretion of the employers and the plan sponsors. And so they, they need to make the decision based on the needs of their employees, whether or not they want to make these, you know, these aspects of the plan available. And, and these, so if you, and also I guess which side it's important to remember that if you put in, you know, hardship language, it doesn't have to be hardship specifically for Katrina, or for Hurricane Sandy. You don't need to put that in there. It can be the generic hardship language, and the same thing for the loans.

For loans and distributions that want to take advantage of the relief provided in this announcement, they need to be done after October 26th but before February 1st of next year. So if you want to take advantage for example of the reduced documentation requirement, those loans need to be take--, or those loans or distributions need to be done no later than February 1st of 2013. Also, they can't be earlier than October 26th. So we don't, if you won't, you won't be able to get it for a plan loan or distribution that you made prior to that that you just don't have the documentation for.

With regards to plans that do not have provisions for loans or hardship distributions, they have until the end of the first plan year that begins after December 31st of 2012. So for a calendar year plan, they would have until December 31st of 2013. That gives them enough time to incorporate the guidance and provide the hardship distribution and/or loan language.

Limitations. As I mentioned before, 72T still applies. This is by far the biggest question that we've had come in. You know, why are you waiving the 72T 10% additional tax. There's nothing in this guidance that waives the 72T additional tax. So keep that in mind. And that also you know goes to other questions that have been asked. Well what about IRAs, what, why isn't there any relief for IRAs. Well IRAs already can make distributions any time, so they really wouldn't benefit by any of these changes. With regards to loans, Section 72P still applies. Any plan loans that are given, and provided in the, under the, under this relief are still going to have to comply with 72P. You know, so keep that, you know, in mind, that the easements here especially with loans is with regard to documentation especially, so.

Next slide is documentation. Plan administrators may rely on representations as to the need and amount of a hardship, unless they have actual knowledge to the contrary. And that's something that I mentioned prior, you know, that if you, if you know that Bob is taking out that distribution or taking out, like taking out hardship distribution, to go buy a boat, well then you, you know, you can't accept his representation to the contrary. But you know we don't want people having to go out and increasing the burden on the plan participants and the plan itself just to take advantage of this relief. Good faith diligent efforts where it's required. You know, if you, if you can get this documentation, then yeah, that's entirely reasonable to get it, but if you can't then you really kind of fall under that reasonable belief, reasonable effort type test.

Just a little FYI, DOL as mentioned in the revenue proceed--, or the announcement, pardon, has said it will not treat any person as violating Title 1, so we do have Title 1 protection in this, in this type of relief. So you won't' have to be concerned that by complying – or taking advantage of the guidance, that by some, you know, some stroke, that you are going to be in violation of Title 1. So.

Let me catch my breath here for a second. I wanted to get on into some of the questions that have come up and kind of answer them in a bit more detail with, you know, a bit a more specificity and give you an idea of what we're looking at and how we read and crafted the announcement. First off, 72T, this, as I mentioned this is by far the biggest question that we've had come in. A lot of the questions start off with the false premise that 72T has been, has been waived. 72, there's nothing in the announcement that waives the 10% additional tax on distributions. In the past, Congress has waived the 10% additional tax via statute in disaster situations. It has not done so yet here. We don't know if or when they might do that. But that's something that we just don't have discretion to change, so we, you know, we grant the relief that we can under that stat--, under the code and the regs right now.

Congress has done that, like I said, they have waived the 10%. They did it in Katrina, and I think some of the similarity there, people have been thinking that, oh, well, you know the 72T census is similar to Katrina, well this has been waived. It hasn't. So a lot of the questions that we've had come in start under the assumption that 72T has been waived. But by far and away this has been the number one question that's come in is, is related to this 72T additional tax. So that hasn't been changed.

The second one that's come in, and this has been actually a little more interesting and a little more in depth here, is regarding the need for amendments. As I mentioned, there's no need for an amendment to take advantage of these, of the Hurricane Sandy relief provisions with regard to hardship distributions or loan provisions, unless those general generic provisions don't exist at all. If your plan has hardship or loan provisions, you know, for, you know, natural disaster or loss of a home, things like that, they're going to be able to take advantage of this as a hardship. That being said, if they're, if they're not, if you don't have the hardship provisions, if you don't have the loan provisions and you'd like to offer those to plan participants, there does need to be an amendment made. And again, the time for making such an amendment is extended until the end of the first year, first plan year following December 31st of 2012. So if the plan does have hardship or loan provisions, there's no need for an additional amendment unless for some reason, the way it was crafted, Hurricane Sandy relief does not fit into that. If it's highly specific or something like that then, then you may need to amend.

For Safe Harbor, for a Safe Harbor plan, for Safe Harbor 401K, if the plan has hardship withdrawal provisions, it's not going to need to amend to cover specific, you know, Sandy type loans. And this really kind of goes into the six months, the prohibition on contributions. We waive that here in the announcement, so they can still keep participating, they can still, you know, do that, but just because it, just because your plan calls for that, you know, the suspension of the, of the contributions there, even though, by, just by virtue of the announcement, you're going to be able to administratively disregard that requirement. So you don't actually need to make a change to your plan to accomplish that. You'll just be able to, as a procedural matter, as an administrative matter, continue to allow those employees to bypass that six month restriction.

Is a plan required to allow loans and hardships? We've had some questions, some questions have actually come in from plan participants who have asked, well, my plan won't let me take a hardship distribution, you know, can I, can I report them, who do I complain to, things like that. And one of the things that we are pointing out is that, you know, plans that don't want to for whatever reason are not required by virtue of this announcement to go ahead and create plan loan language or hardship distribution language, or to allow these for plan participants. It's up to the discretion of the individual plan sponsors. I think most plan sponsors want to take advantage of this. One of the questions came in with regard to a savings plan for federal employees. And that's, that's a really good question. I actually saw a note that came across my desk today saying that there were, there were, you know, increased availability for hardship distributions. I didn't get into the nuts and bolts of what's allowed. But with that, a decision was made by the TSP board, by the plan administrator, as to whether or not you know, or as to how they were going to you know use this guidance and take advantage of it.

I mentioned before, if the plan language prohibits the contributions but you want to take advantage of the announcement to allow the contributions within the six month time period, it's purely administrative stuff. You can completely bypass that without amending your plan.

So your Sandy related loans and distributions, they must be taken by February 1st to be able to take advantage of the relief. This really kind of comes into play especially with regards to documentation, you know, for plan loans and for, you know, for hardship distributions where you may not be able to document things. You know, the decreased or the lax view of documentation is only going to be applicable for those loans and distributions taken up until February 1st. so if someone takes it out on February 2nd there's, they're not going to be covered by this. They're still going to have to, you know, provide the necessary documentation, be subject to the same rules and requirements, the same plan conditions that they were apart from this announcement. So that's something that I think plan administrators need to be aware of and probably need to communicate to the employees that wish to take advantage of this. And one of the things we'll kind of get into, this is a, this is a much bigger issue and question that's kind of come across our desk. And this is regarding plans that require that all loans be taken out prior to being able to take a hardship distribution. Now for Safe Harbor 401K plans? They, you know, it's, it's a condition under the regs that the employer needs to show that before they take a hardship distribution that there's no alternative means available. And they kind of look at that and one of things they say is, you know, they talk about, you know, currently available, or like loans, or ESOP dividends, things like that have to be shown that they're not available.

Now, where this comes is I think with, you know, with larger providers, you know, people who may have difficulty obtaining a loan. Now, in the four, in the Safe Harbor 401K regs, under D, capital D there, it says, it's actually one dot 401K dash one D three, capital D, and it says the employee need not take counterproductive action. And here the employee, even though they're required to exhaust the other means of help, they don't need to take something that's counterproductive. Now, the example that they give there is if by taking up, if applying for a loan, a, you know, a plan loan is going to lower their credit score, and therefore make it impossible for them to take the house for with, or to buy the house for which they're using the plan loans for, that's counterproductive, and that's the example they use. Now, in the case of hurricane relief, I think you know we would agree that a plan sponsor or an administrator that can own, that would require, you know, a very long time to get a loan approved and, you know, processed, we're, I wouldn't think that those are, I would, I would agree that those are counterproductive actions, especially given the time sensitive nature of this type of relief. So you know I would take advantage of this, especially for the Safe Harbor plan.

Now, again, we realize that not everybody out there is a Safe Harbor 401K plan, and we're not saying that you need to be to take advantage of any of that type of relief. If you look on the paragraph that begins "in addition," it's on page 3, on line, it's the one, two, three four, it's the sixth paragraph under "Relief," the "in addition" paragraph says with respect to hardship distributions, no failure to follow procedure simply because a distribution loan is made, so long as a good faith effort is made. You know, we kind of, I see this as a catch-all, and I think that this kind of picks up the same situation that I described earlier with regard to the Safe Harbor 401K. That other plans that have administrative requirements within the plan that want to ease those in order to make these provisions applicable to their employees, it seems that they would fall into this and would be, and would be covered, and would be able to shorten up some of the time or to be of, to be able to avoid some of the administrative burden that necessarily follows some of things, or some of the, you know, some of the relief might otherwise entail. So that's kind of how I see that. Now again I think, with all of these, the devil's kind of in the details, and unfortunately I don't think that we would be, you know, capable of giving, you know 100% type situations or being able to walk through a situational analysis for every conceivable possibility that you as representatives and as plan sponsors are going to encounter. That being said, you know, we're here, we're happy to kind of, you know, walk through these as best we can to give you an idea of our reading of these things and how we kind of anticipate them going. You know again, that's not, that's not perfect reliance and it may not be, you know, what you think you need, but you know we're happy to follow up. Our goal is to make sure that, that, you know, plan participants have access to these, to these funds and to these provisions and that employers and plan sponsors are able to take advantage of them to help their employees. So, you know with that as the, you know, the overriding goal, that's, that's our view of this piece of guidance.

You know and that's, and that's kind of where we're at. Again, if you look on the PowerPoint I've left, you know, contact information. Every one of those questions that's sent there to Retirement Plans Questions at irs.gov, I will see, I will get to you either personally or through someone in my group. That being said, I've heard from a lot of you already and if you guys do have any questions feel free to contact me directly. If you do submit a question to Retirement Plans Questions, address it to me and, and you know, and the more specific the question, the better. But I'm happy to get to them and I will try to do that as best we can.

That's all that I've prepared for today, so we've gone over from the questions I've seen, this has really covered 99.9% of the questions that have come in, and so I hope that it's been helpful to each of you and I hope that we, you know, that we can, you know be of some help in the future in making sure that you guys understand the guidance that I just, as [unint.] the challenges that either prevent you from taking full advantage of it, or you know just you know the challenges in general that we can address. Thank you.

MO:  Well, thanks Eric. Good day to everyone.