Unfortunately, disaster scenarios have become all too common and can cause significant disruption for employers, employees and their affected family members. In the wake of Hurricanes Harvey, Irma, and Maria, Paul Hamburger, co-chair of Proskauer’s Employee Benefits & Executive Compensation Group, explores the unique issues that employers must consider when preparing their employee benefits disaster relief programs.
Welcome to the Proskauer Brief: Hot Topics in Labor and Employment Law. My name is Paul Hamburger and this is Part 2 of our podcast series employee benefit plan related issues in the context of disaster recovery situations.
As we explained in our first part of this podcast series, there are two ways to look at disaster relief recovery programs from an employee benefits perspective. On the one hand you need to consider the impact on employers and employee benefit plans and on the other hand, you need to consider the impact on employees, participants and beneficiaries. In considering employer or plan related relief, the first area of relief relates to filing requirements. A number of filings, tax related and other had to be made within what is sometimes referred to as the post disaster period. So for example, that would be the period after August 23rd in the case of Hurricane Harvey and after September 6th in the case of Hurricane Irma.
Many filings such as annual report form 5500 filings may have come due during that period. Well, the IRS and the Department of Labor and the Pension Benefit Guaranty Corporation have all relaxed their filing requirements so that filings that are due after those disaster dates and before January 31, 2018 could be filed by January 31, 2018 and the employer or vendor acts reasonably under the circumstances.
There are exceptions to that rule for certain types of filings. For example, filings that are needed because they may cause an immediate impact on participants or it may reflect a filing for a severely underfunded plan. In those cases, the PBGC has not necessarily relieved employers of those filing requirements.
Another aspect of administrative relief available to employers and plans who may want to take advantage of some of these relaxed rules is that documentation does not necessarily have to be put in place at the outset before taking advantage of these rules. That can be particularly helpful when employers need to act quickly on the ground and don’t have the time to necessarily make sure all of the paperwork is in place.
When you’re dealing with employees and participants and beneficiaries and relief available to them, one of the key aspects relates to providing them with access to their money that otherwise might be held in an employee benefit plan such as a 401K plan. In this case, participants may want to take advantage of plan loans or hardship distributions in order to access their funds. Even if a plan currently does not allow for plan loans, employers are allowed to make loans available from their 401K plans or other similar employee benefit plans and have the documentation catch up after the fact.
Similarly, hardship withdrawals may be made available on account of Hurricane Harvey or Hurricane Irma. In those scenarios, the mere fact that the participant states that the need is there should be sufficient to allow for making the distribution. Again, employers need to act reasonably under the circumstances to ensure that the money that is being made available is appropriate to the request. Moreover, plans cannot make available funds that otherwise could not have been available due to a hardship. For example, qualified non-elective contributions or qualified matching contributions or safe harbor matching contributions cannot be available for hardship distributions and disaster relief is no exception.
If a participant were to take advantage of an in-service distribution there is no exception to the 10% tax penalty associated with those distributions. Separate from the administrative rules that are relaxed for making loans and hardship distributions available to employees is the requirement that ultimately those decisions do need to be documented. The IRS has indicated that plan amendments reflecting any relaxed loan or hardship distribution provisions need to be done by the end of the 2018 plan year.
Employers wanting to take advantage of these rules are strongly encouraged to make sure that those amendments get done as soon as practicable because this is definitely an audit issue after the fact such that down the road, if the IRS were to audit a qualified plan, the IRS would be looking to see whether plan provisions supporting distributions were timely put in place.
Separate from providing employees, participants and beneficiaries with access to funds, the government has provided certain other guidance in the form of notices and press releases related to health coverage. Obviously, health coverage is a very important issue not just for people who are impacted by immediate health related needs because they might have been injured in the disaster scenario but it is also related to health care coverage that might be needed because employees may lose their jobs, for example, where an employer’s business completely went out of business due to being destroyed in a hurricane.
In many of these situations, employees may be relying on what is known as the COBRA health care continuation rules available when individuals either lose their jobs or have a significant decline in the hours of employment. In order to determine whether COBRA is available, COBRA operates under strict time frames. Notices have to be provided by a certain date. Elections have to be made by certain other dates. Premiums need to be paid within certain specified time frames. All of these time frames may be completely disrupted in any sort of disaster scenario. Just imagine how difficult it is for mail, for example, to either be picked up or delivered in a place that is completely flooded out.
In these scenarios the government has not provided strict relief as much as the government has indicated that employers and plan administrators need to act reasonably under the circumstances. It’s important that employers and plan administrators not apply strict timing rules where it is very clearly difficult if not impossible for employees or participants to adhere to those timing rules.
This is just a summary of the many, many rules that could apply in an employee benefits context whenever an employer is dealing with a disaster recovery scenario. Employee benefits are just a small part of an overall picture and employers should make sure that they take all reasonable steps to have an overall coordinated and compliant disaster recovery program. Thank you for joining us for this brief podcast and please stay tuned and look for more insights that are available on the Proskauer website in the future.
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