IRS relaxes certain rules for Louisiana flood victims

The IRS has provided various forms of relief aimed at assisting Louisiana flood victims and their families. In Announcement 2016-30, the IRS said that Section 401(k) plans and similar employer-sponsored retirement plans may make loans and hardship distributions to affected participants and their families even if the plans’ written documents don’t currently allow for them. Affected participants include those who on Aug. 11, 2016, lived or worked in areas identified as federally declared disaster areas.

Under this relief, the plan sponsor may rely on a representation from the participant regarding the need for and amount of a hardship distribution unless the plan administrator has knowledge to the contrary. The amount of the hardship distribution is limited by the maximum amount permitted to be available for a hardship distribution under the tax code and regulations. However, the relief applies to all hardships of the participant and family, not just the types listed in the regulations. Affected participants aren’t subject to the rule that prohibits participants from making contributions to a plan for at least six months after receiving a hardship distribution. To qualify for this relief, the hardship distribution must result from hardship generated by the Louisiana flooding and must be taken on or after Aug. 11, 2016, and on or before Jan. 17, 2017. These hardship distributions can be included in the participant’s gross income but aren’t subject to the additional 10% tax under Section 72(t).   

This relief also applies to plan loans. The plan sponsor may disregard the plan’s procedural requirements for plan loans for any period beginning on or after Aug. 11, 2016, and extending through Jan. 17, 2017. However, the plan administrator must make a good-faith, diligent effort under the circumstances to comply with those procedural requirements. Also, as soon as practicable, the plan administrator must make a reasonable attempt to assemble the required documentation.   

For this relief to apply to hardship distributions and plan loans, a qualified retirement plan that does not provide for a loan or hardship distribution must be amended to provide for them no later than the end of the first plan year beginning after Dec. 31, 2016.  

The IRS also created a special leave-based donation program to aid Louisiana flood victims (Notice 2016-55). Employees who surrender unused paid time off (PTO) under a program in which the employer contributes the value of the PTO before Jan. 1, 2018, to a Section 170(c) charitable organization for the relief of victims of the Louisiana flooding will not be required to recognize compensation income for the value of the surrendered PTO.   

Because the value of the surrendered PTO can’t be included in the employee’s income, the employer isn’t required to report the value on the employee’s Form W-2 or withhold federal income taxes or Federal Insurance Contributions Act (FICA) taxes. The employer is allowed a compensation deduction under Section 162 for the value of the PTO contributed to the charitable organization. However, the employee is not allowed a charitable contribution deduction, because the value of the surrendered PTO is not included in income.

The IRS made available similar relief for victims of Hurricane Sandy in 2012 (Notice 2012-69), Hurricane Katrina in 2005 (Notice 2005-68), and the Sept. 11, 2001, terrorist attacks (Notice 2001-69). In addition, the IRS provided significant general filing and payment relied for Louisiana flood victims.

Contact Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

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