Employee Benefits Alert
IRS Announces Qualified Disaster Treatment of Payments and other Relief for Victims of Hurricane Sandy
Marianna Dyson and Fred Oliphant
Qualified Disaster Relief Payments
The Internal Revenue Service (IRS) on November 4, 2012, alerted employers and other taxpayers that because Hurricane Sandy has been designated as a "qualified disaster" for federal tax purposes, the amount of qualified disaster relief payments made to individuals by their employer or any other person can be excluded from those individuals' taxable income.
The gross income exclusion rules for "qualified disaster relief payments" are provided in section 139 of the Internal Revenue Code (Code). Covered payments include amounts used to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses, provided such expenses are not compensated by insurance or otherwise. Payments also may be provided to reimburse or pay reasonable and necessary expenses for the individual's repair or rehabilitation of a personal residence, or for the repair or replacement of the residence's contents, to the extent attributable to the qualified disaster, provided such repair, rehabilitation, or replacement expenditures are not compensated by insurance or otherwise. Qualified disaster relief payments also are excludable for purposes of self-employment taxes and employment taxes. Thus no withholding applies to qualified disaster relief payments and such payments are not subject to information reporting under Code section 6041. Notwithstanding that qualified disaster relief payments are excluded from gross income, the legislative history to Code section 139 notes that it was intended that payments excludable under section 139 be deductible to the same extent that they would be if the payments were includable in income. The long standing position of the IRS is that an employer may deduct amounts expended or accrued by way of rehabilitation of employees for injuries and damages sustained in a major disaster.
Relief Payments from Employer-Sponsored Private Foundations
The IRS also announced that the designation of Hurricane Sandy as a qualified disaster means that employer-sponsored private foundations may provide disaster relief to employee-victims in areas affected by the hurricane without affecting the tax-exempt status of the foundations. The IRS points out that such employer-sponsored private foundations, like all charitable organizations, should follow the guidance in Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations, in exercising due diligence when providing assistance to employees or their family members affected by Hurricane Sandy. The IRS has also announced that it will provide expedited review of organizations seeking tax-exempt status in order to provide relief for victims of Hurricane Sandy.
Liberalized Employer Leave-Based Donation Programs to Aid Hurricane Sandy Victims
On November 6, 2012, the IRS issued Notice 2012-69 which provides guidance to employers that wish to establish leave-based donation programs for employees to use in aiding Hurricane Sandy victims by forgoing vacation, sick, or personal leave in exchange for cash payments the employer will make to a public charity. The Notice indicates that the IRS will not assert that the cash payments made to the charity constitute gross income to the employees, provided the payments are made to a Section 170(c) organization for the relief of victims of Hurricane Sandy and are paid to such organizations before January 1, 2014. Electing employees, however, will not be able to claim a charitable deduction. With regard to the employer's deduction, the guidance indicates that the IRS will not assert that the employer's deduction is limited under the rules of Code section 170, rather than Code section 162.
Return Filing and Tax Payment Deadlines Extended
The IRS has announced in IR-2012-83 that for taxpayers in certain counties in Connecticut, New Jersey and New York, various tax filing and payment deadlines that occurred starting in late October have been extended until February 1, 2013. The extended deadlines include the fourth quarter individual estimated tax payment, normally due January 15, 2013, and payroll and excise tax returns and payments for the third and fourth quarters of 2012. The relief also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period. The IRS will automatically abate any interest, late-payment or late-filing penalty that would otherwise apply. In addition, the IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster start dates (October 26 for affected areas in New Jersey; October 27 for affected areas in New York and Connecticut) and before November 26, if the deposits are made by November 26, 2012. The IRS stated that it will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy.
Plan Sponsors can Provide Relief for Employees Affected by Hurricane Sandy
Mike Chittenden and Fred Oliphant
Employers seeking to ease the hardships faced by employees in the aftermath of Hurricane Sandy may want to look for additional flexibility with regard to their 401(k) and profit sharing plans from the IRS and Congress. The IRS has already provided relief from some deadlines, such as return filing deadlines and payroll tax payment due dates. If history is a guide, additional relief could soon be on the way for defined contribution plan participants.
In response to Hurricane Katrina, the IRS liberalized the safe-harbor hardship withdrawal rules for certain hurricane-related withdrawals. Under the relief, plans could rely on participants' representations regarding the need for, and amount of, hardship withdrawals and the requirement for post-distribution contribution suspensions was eliminated. Relief from some procedural distribution requirements was also provided. While the IRS has not yet indicated that it intends to provide similar relief in response to Hurricane Sandy, it appears that it has the authority to do so without Congressional action based on its response to Hurricane Katrina.
Congress has also sought to ease distribution rules from qualified plans following natural disasters. Following Hurricane Katrina, Congress added section 1400Q to the Code, permitting "qualified hurricane distributions," delayed loan repayments, and increased loan limits for those in areas affected by the storm. The section was subsequently amended to provide similar relief to participants affected by other hurricanes, and was used to provide relief to those affected by flooding in the Midwest. During the upcoming lame-duck session, it is possible that Congress may consider similar relief for participants affected by Hurricane Sandy.
Even without relief, plan sponsors can take immediate steps to provide relief to employees affected by Hurricane Sandy, including:
- Amending plans to permit participant loans and hardship distributions, if they are not already permitted. These provisions may be designed, subject to potential non-discrimination testing, to sunset after a period of time or the plan may be amended later to remove them.
- Amending plans to permit withdrawal of after-tax or rollover amounts or to permit in-service withdrawals for employees over age 59 ½, if not already permitted under the plan terms. Withdrawals could be provided for a subset of employees (such as those in certain states or, possibly, those taking distributions within a specified time period), but are subject to non-discrimination testing. In-service withdrawals are a protected benefit and cannot be eliminated once added, so employers should carefully consider this change before deciding to add such withdrawals.
- Considering other means of getting distributions and withdrawals to employees in affected areas that do not have access to their usual bank accounts due to flooding or power outages. For example, employers might consider arranging for the plan to provide direct deposit if not already provided.
Absent relief from the IRS or Congress, formal plan amendments to implement the plan amendments described above will need to be adopted by the end of the plan year.
For more information, please contact:
Marianna Dyson, email@example.com, 202-626-5867
Fred Oliphant, firstname.lastname@example.org, 202-626-5834
Mike Chittenden, email@example.com, 202-626-5814