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Good day, ladies and gentlemen, and welcome to today's webcast entitled: Disaster relief for retirement plans. At this time, it is my pleasure to turn the floor over to your IRS presenter, Steve. Sir, the floor is yours. STEVE: Welcome to this presentation, Disaster Relief for Retirement Plans. We have a few announcements before we get started, the information contained in this presentation is current as of the day it was presented, and should not be considered official guidance. No identification with actual persons living or deceased, places, buildings, and products is intended or should be inferred. This program is being recorded and will be maintained under federal recordkeeping laws. Now, let's get started. Today we will provide an overview of the various legislative changes enacted to assist plan participants affected by severe weather in the United States. I will be going over the various legislative initiatives that provide this relief, discussing the changes and their effect on retirement plans. In doing so, we will cover three statutes. We'll begin with the Disaster Tax Relief and Airport and Airway Extension Act of 2017, which I'll refer to as the 2017 Disaster Act. The second is the Act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the Budget for Fiscal Year 2018, which I will refer to as the Tax Cuts and Jobs Act of 2017. Eye The third is the Bipartisan Budget Act of 2018. All three of these provide disaster relief to storm victims, specifically for Hurricanes Harvey, Irma, and Maria, and for victims of the 2017 California wildfires. The Tax Cuts and Jobs Act extends this relief to any other federally declared disaster in 2016. These statutes provide relief to plan participants by creating a specific qualified disaster distribution which is exempt from the early distribution tax otherwise imposable and expand participant loan availability to provide victims with access to their retirement savings to recover from these disasters. Congress enacted similar legislative relief in 2005 to provide victims with access to their retirement funds in response to hurricanes Rita and Wilma, which occurred on or about September 23rd, 2005, and October 23rd, 2005, respectively. These statutes, known as the Katrina emergency tax relief act of 2005, or KETRA, and the Gulf opportunity zone act of 2005, GOZA, provided storm-specific relief similar to the relief provided under the three statutes mentioned previously. The 2017 Disaster Act, public law 115-63, was enacted after hurricanes Harvey, Irma, and Maria, to provide tax relief to taxpayers affected by these storms, and funding for other measures, such as airport improvements. This tax relief includes 3 pension-specific relief measures which form the basis for our discussion. Note that this relief is substantially similar, both to that provided in 2005 and to the two other new laws we'll cover today. Here are the beginning dates of each of these storms, each of which sets up a statutory relief period. For example, the Act increased the amount of participant loans available to a victim of Hurricane Irma beginning September 4, 2017. For a Hurricane Maria victim, this same relief is available but beginning on September 16, 2017. These are known as the qualified beginning dates, and are important for determining the period during which relief is available, and when plan amendments are drafted. The next two slides list the three elements of relief and the deferred plan amendment requirement enacted by the 2017 Disaster Act. The first is a waiver of the Code Section 72T tax on early distributions for what are known as qualified Hurricane distributions. Under the current law, if a participant takes money out of a plan in addition to paying tax on the distribution, he's assessed a 10% early distribution penalty if under age 59 and a half, unless an exception applies. The Act provides those affected by the storm can take a distribution without this penalty. The second change provided by the Act broadens the amount of available participant loans. Under applicable law, loans are limited by Code Section 72P, providing that a loan from a plan to a participant can't be more than 5 years. The Act increases that amount to $100,000, and allows an extra year to the 5 years of the original loan repayment period. These are known as qualified Hurricane Loans. The $100,000 maximum amount is like the presumptive relief amount provided by Congress which can be drawn from retirement savings to alleviate disaster conditions. The third and final relief measure is the ability for individuals to recontribute funds withdrawn as a hardship distribution to provide funding for a home purchase. Regulations under Code Section 401K list those conditions which qualify a participant to take a hardship distribution. One of these is for the acquisition of a principal place of residence. However, once a hardship distribution is made, absent this relief, there is no way to call it off and put the money back into the plan, if the intended property was storm-damaged. This Act provides relief for these types of distributions by allowing the recontribution of a previously distributed hardship amount made during the participant's qualified beginning period, as applicable for each particular storm, and ending in 2018. Each of these 3 relief measures permits a plan to operate in accordance with the statutory changes, before the plan document is amended, to conform and reflect these changes. We will now examine each of these relief measures, and then review the remedial amendment period for making plan amendments reflecting these changes. Let's discuss the relief from imposition of the early distribution penalty tax on qualified Hurricane distributions.

Absent the relief provided by the Act, early, or premature, distributions, which are those made to a participant under age 59 and a half, are subject to the Code Section 72T, 10% additional tax, unless certain exceptions to this tax are met. These exceptions are very limited. Thus, most distributions to young participants are subject to this 10% additional tax. Code Section 72(t)(2) lists the exceptions, but notably these don't include a blanket exception for hardship distributions, which participants often rely on for disaster recovery. This might otherwise put participants trying to recover from one of these three hurricanes in a quandary. They might qualify for a hardship distribution from their 401K accounts because they have an immediate and heavy financial need in trying to recover from the storm, but don't meet an enumerated exception from the imposition of the 10% early distribution tax that would apply. This means in requesting an amount certain, as established and necessary, as established and necessary to alleviate a need, a participant would otherwise get hit with a 30% reduction in the gross proceeds available for distribution, in the form of 20% backup withholding at the point of distribution, and then owing a 10% additional tax, which is reported on form 1040, Line 59. Let's discuss the relief afforded by this Act. Specifically, the Act exempts qualified Hurricane Distributions from the Code 72(t) 10% additional tax. For this purpose, a qualified hurricane distribution is an amount up to $100,000, paid to a taxpayer affected by one of the three designated hurricanes in the applicable disaster area, and beginning on the dates on Slide 5. A participant may still have to pay tax on the amount received. The Act only exempts them from the 10% additional tax that would apply over and above any income tax that is otherwise owed. However, once they receive those funds, in addition to being exempt from the additional tax, the funds can be either recontributed back into an eligible retirement plan, or can be income-averaged over a 3-year period. We'll discuss these alternatives on the next four slides. On this slide, we discuss the ability of a participant to recontribute a withdrawn qualified hurricane distribution. Absent the 2017 Disaster Act, generally only loan repayments can be recontributed back into a plan.

Although distributions can be rolled over to another plan or to an IRA if they are eligible rollover distributions, hardship distributions, which are usually invoked in disasters, aren't eligible rollover distributions. Thus, absent the Act, money requested in the form of a hardship distribution for a participant to recover can't be recontributed back into the plan or rolled over into another plan even if a participant no longer needs or desires to have use of the funds. The 2017 Disaster Act allows for qualified hurricane distributions to be recontributed back into the sourcing plan, or rolled over into an IRA if the recontribution rollover is made within 3 years from distribution. Again, this applies to qualified hurricane distributions made beginning on the qualified beginning date as applicable to one of the storms itemized in Slide 5.

The Act treats these distributions as an eligible rollover distribution subject to a three year limitation period. Instead of recontributing the proceeds back into a plan, and putting the funds back into retirement savings status, a participant may decide he needs those funds and cannot put them back. In that case, the funds are subject to income averaging as an additional relief measure, which we discuss on the next two slides. When a participant withdraws money from a plan, unless it is a return of an after-tax contribution, it will be taxable as ordinary income. The value of the distributed amount is reported on Form 1099-R for the distribution year, and unless an exception from withholding applies, 20% backup withholding usually applies. Note there are exceptions to this rate, and to withholding rules generally, such as to foreign taxpayers covered by a tax treaty, which are beyond the scope of this presentation. The taxpayer then reports this distribution amount on his income tax return, and pays the applicable tax thereon. Absent withholding exemptions and the Act itself, there are generally no exceptions to this timing of income recognition rule. Let's discuss the alternatives to recontributing a prior qualified hurricane distribution, which include either recognizing it in income immediately, or averaging it over a three-year period. The Act provides additional disaster relief for taxpayers who do not repay the proceeds to the plan. Instead of recognizing the distributed amount in the year received, a taxpayer can recognize and report it for income taxes over a 3-tax-year period, beginning with the tax year that includes the distribution date. Two notable parses exist in the statutory language. First, the statute provides, quote, unless the taxpayer elects otherwise, end quote, which implies that three-year income averaging will be deemed to be the default choice. An alternate election such as recognizing it immediately would presumably be made by tax return reporting. Second, the terms, quote, ratably over the 3 taxable year period, end quote, imply income must be recognized 1/3 each year equally in each of the 3 taxable years. Let's discuss another relief measure provided by the 2017 Disaster Act, which is the ability to recontribute amounts previously distributed as a hardship distribution. As we introduced earlier, when money is withdrawn from a plan, there is no way to put it back if the originally identified hardship event no longer requires full use of funds. Because the amounts aren't otherwise eligible for rollover, a participant can't call off a hardship distribution or return some or all of the distributed amount back into retirement savings, even if the hardship event no longer exists. This is especially possible in the wake of hurricanes or other natural disasters.

Consider: One of the conditions for getting a hardship distribution is to use available retirement funds for the purchase of a principal residence. A participant might get a hardship distribution of a certain amount of money to make this purchase, only to find out before closing that the intended property is severely damaged, or even destroyed. Absent relief, there would be no way to return the funds back into the distributing plan, essentially trying to call off the hardship distribution. A participant would be stuck in a quandary, having money that must be used for its intended use, which can't be returned. This lists the relief provided by the 2017 Disaster Act. Taxpayers in any of the areas affected by the three previously enumerated storms were permitted to recontribute these hardship distributed funds, as long as they returned an amount equal to the value of the previously distributed amount. The Act treated such a distribution as if it were an eligible rollover distribution, providing a rollover period that ended on February 28, 2018. If the participant returned the money by that same date, he could essentially call off a hardship distribution. This return of funds can be made into any plan in which the individual is a beneficiary. For example, the sourcing distribution plan, a new employer’s plan, or a participant's personal IRA. Here we move to participant plans. First, a quick refresher on rules applicable to participant loans from qualified retirement plans under rules provided by Code Section 72(p). Absent relief, Code Section 72(p) provides that whenever a participant borrows from a qualified plan, he is subject to various limitations, such as a limitation on the amount which can be borrowed up to the lesser of $50,000 or 1/2 the participant's vested account balance. Unless the loan is to acquire a principal residence, the maximum loan term duration is 5 years from the date the loan is made. Following issuance, the loan must be repaid over these 5 years, on a level premium amortization with repayments occurring not less frequently than quarterly. This means no interest can be deferred or payments skipped. Failure to meet these rules results in the loan being treated as a taxable distribution. For participants affected by one of the three storms effective with the qualified beginning dates previously discussed, these requirements are relaxed for qualified Hurricane Loans. The maximum amount a qualified participant can borrow from his retirement plan is increased to $100,000 without regard to whether this exceeds half his vested account balance. The loan duration period is extended by one year for loans coming due during the qualified beginning dates reflected on Slide 5, through the end of 2018. This extension gives participants a repayment period that allows one extra year to pay the loan. Any interest due for this extra year is added in over the extra repayment period. We've discussed relief to plan participants and providing them the ability to access retirement savings funds. Now we'll discuss the period by which plan amendments are due to employer plans to reflect these changes. The changes described would be otherwise disqualifying provisions if they were operationally followed, but plan terms did not comply. For example, if a plan made a $100,000 loan and the plan language didn't so permit it, the plan would have failed to follow its own written terms in operation.

Code Section 401(b) provides for disqualifying provisions extant resulting from changes in law or guidance. Plans have an extended remedial amendment period to amend to conform. For this purpose, an amendment's due date would be governed by Revenue Procedure 2016-37, which provides that the amendment would be due two years from the date the 2017 Disaster Act or its final administrative guidance is placed on the IRS's required amendments list. However, the Act supplies its own amendment due date requirements. For purposes of amending plans to conform to changes made pursuant to this Act, the due date for this amendment is deferred until the last day of the first plan year beginning after January 1, 2019, which, for a calendar-year plan, would be December 31, 2019. Governmental plans are afforded two additional years to adopt their conforming amendments, which, for a governmental plan administered on a calendar-year basis, would be December 31, 2021. These changes apply to plan documents administering both qualified retirement plans under Code Section 401(a), and to tax sheltered annuity arrangements described in Code Section 403(b). We've used the term, quote, the Act, end quote, to refer to the 2017 Disaster Act. We've used the term, quote, The Act, end quote, to refer to the 2017 Disaster Act.

We're now going to switch gears and review the Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017. As to disaster relief, the Tax Cuts and Jobs Act expanded the disaster relief originally provided for in the 2017 Disaster Act to any other federally declared disaster retroactively into 2016. The Tax Cuts and Jobs Act provides three changes applicable to qualified retirement plans and IRAs. Two of these are beyond this presentation's scope, but we will briefly itemize them here. The first is an extension of the time to roll over a plan loan offset until the due date of the participant's income tax return to complete a rollover. The second is a repeal of the rule permitting an IRA contribution to be recharacterized to unwind a Roth conversion up to the due date of the individual's applicable income tax return. Third is an expansion of the relief initially provided by the 2017 Disaster Act to any other 2016 or 2017 federally declared disaster. The Tax Cuts and Jobs Act provides similar relief to that already provided by the 2017 Disaster Act, but expanding it to any qualified 2016 and 2017 disaster distribution, defined therein by statute. These are the same qualified plan distributions up to a $100,000 maximum, to any taxpayer in a federally declared disaster zone sustaining a loss between January 1, 2016, through December 31, 2017. The Tax Cuts and Jobs Act allows a qualified 2016 disaster distribution to be ratably included in income or recontributed back into an eligible retirement plan within a period over 3 years from the distribution date, and waives imposition of the Code Section 72T additional tax. Two elements of relief provided by the 2017 Disaster Act are not replicated in the Tax Cuts and Jobs Act. They are the expansion of participant loan limits above the Code Section 72P requirements, and the ability to recontribute previously distributed hardship distributions back into the plan. These two relief measures are only available to participants affected by the three previously discussed hurricanes, and, as will be discussed momentarily, participants affected by the California wildfires. The Tax Cuts and Jobs Act also provides for a remedial amendment period for a plan to adopt conforming changes. A plan amendment for this purpose is due no later than the last day of the first post-2018 plan year, December 31, 2019, for calendar year plans. The Bipartisan Budget Act of 2018 account provided relief for storm affected taxpayers and addresses victims of the 2017 California wildfires. Like the relief provided by the 2017 Disaster Act, the Bipartisan Budget Act also provides for an exemption from the Code Section 72(t) tax for qualified disaster distributions up to $100,000. Unlike the Tax Cuts and Jobs Act, the Bipartisan Budget Act also provides for expanded participant loan limits, and permits hardship withdrawals previously distributed to purchase or construct a primary residence to be recontributed, if the disaster prevented the transaction. The deadline to make this recontribution was June 30, 2018. This concludes our presentation of the relief provided for in the three statutes providing disaster relief in 2017 and 2018. The 2017 Disaster Act and Tax Cuts and Jobs Act, and the 2018 Bipartisan Budget Act. Slides 26 and 27 list additional resources. Note that publication 590-B contains additional information regarding IRA distributions. We hope this information has been helpful. On behalf of all of us here at the IRS, thanks for viewing this presentation.