Hurricane Katrina Raises HR Issues
To help survivors of Hurricane Katrina recover from their losses, Congress has passed a $6.1 billion law providing tax relief to affected individuals and businesses, while the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) have eased the rules on 401(k) distributions, leave-based donation programs, and tax-filing deadlines. Federal agencies have also issued guidance to employers and employees impacted by the disaster regarding their employee health and insurance plan obligations.
The DOL said it would not treat any person as having violated ERISA for taking advantage of the provisions of IRS Announcement 2005-70, which permits Katrina survivors to make hardship and loan withdrawals from 401(k) and other qualified employer-sponsored plans without providing the usual documentation.
"Helping Hurricane Katrina's survivors get back on their feet is our highest priority," said Secretary of Labor Elaine L. Chao. "These actions will make it easier for those in need to get hardship withdrawals and loans from their 401(k)s and similar plans so they can begin rebuilding their lives."
The IRS issued guidance stating that retirement plans may offer this relief to Katrina victims and their families who live or work in the disaster area to help them repair or replace their homes, or for some other purpose, such as food and shelter. People who live in other parts of the country are also allowed to use 401(k) loans or hardship distributions to help family members who lived or worked in the disaster area. Any withdrawals made by plan participants under the age of 59½ would, however, be subject to taxes and the usual penalty of 10% for early distributions. Loans remain tax free if they are repaid within five years.
The IRS announcement allows plan sponsors to make these loans and hardship distributions before the plan is formally amended to provide for these features, and permits employers to relax the requirement that participants produce certain documentation to justify hardship distributions. The six-month ban on new 401(k) contributions for employees who take hardship distributions will not apply to Hurricane Katrina survivors. Hardship withdrawals must be made by March 31, 2006.
"As in other areas, we are doing everything we can to help Hurricane Katrina victims rebuild their lives," said IRS Commissioner Mark W. Everson. "This relief will make it possible for people to get their retirement money more quickly with a minimum of red tape."
The IRS also granted in Notice 2005-68 special tax relief for leave-based charitable donation programs aiding survivors of Hurricane Katrina. Under the new rules, employees who forgo vacation time or other forms of paid leave in exchange for employer cash payments to hurricane relief organizations do not have to include the donated leave in their income. Employers making cash payments to these charities on behalf of employees before January 1, 2007 are permitted to deduct these payments as an ordinary and necessary business expense, rather than as a charitable contribution.
Signed into law by President Bush on Sept. 23, the Katrina Emergency Tax Relief Act of 2005 provides additional tax relief for Katrina victims. Among other provisions, the new legislation waives the 10% penalty for premature distributions from 401(k)s and IRAs, raises the limit on loans from qualified retirement plans from $50,000 to $100,000, and allows retirement plan participants to pay income tax on distributions over three years.
The legislation also includes a two-year extension of the Work Opportunity Tax Credit (WOTC) to Gulf Coast employers hiring workers who lived in the disaster area before the hurricane and became unemployed as a result of damage or destruction to their previous places of employment. Small employers whose businesses were damaged in Hurricane Katrina may claim a tax credit equal to 40% of the first $6,000 on wages paid to employees through the end of the year. In addition, the law contains enhanced deductions for businesses contributing cash and certain items to hurricane victims.
On Sept. 19, the DOL, the IRS, and the Treasury Dept. issued a notice extending Consolidated Omnibus Budget Reconciliation Act (COBRA) and Health Insurance Portability and Accountability Act (HIPAA) deadlines for health plan coverage for employers and employees affected by the hurricane. These extensions give Katrina victims who are without health insurance additional time to request enrollment in another group plan, and secure new insurance without losing coverage for pre-existing conditions. The modified rules also allow victims more than the currently mandated 60 days to request COBRA coverage, and provide them with more time to make their COBRA payments. In addition, the time frames for HIPAA- and COBRA-related disclosures have been extended for plan sponsors affected by the storm.
