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IRS Offers Loan Options for Hurricane Harvey Victims

  • In the wake of Hurricane Harvey and impending Hurricane Irma, the IRS has issued tax relief, filing extensions, and guidance for taking out loans against retirement plans for individuals and businesses residing or located in designated disaster areas.
  • Affected individuals with tax returns due on or after Aug. 23, 2017, and before Jan. 31, 2018, will have until Jan. 31, 2018, to file their 2016 returns.
  • The IRS extended the Form 5500 filing deadline to Jan. 31, 2018, for businesses located in FEMA-designated disaster areas from the original date of Oct. 16, 2017.
  • Employers in disaster area face challenges in obligations toward their workforces.

Two IRS regulations provide help to storm victims

With the Houston area and Louisiana coastal areas reeling in the aftermath of Hurricane Harvey, which struck Aug. 23-Sept. 2, 2017, the Internal Revenue Service (IRS) has pushed back certain deadlines for those affected by the storm. In some cases, Harvey victims can withdraw money from 401(k) retirement savings plans for rebuilding.

The IRS has delayed certain tax filing deadlines and extended provisions for hardship distributions and plan loans. The agency's actions come as Florida residents brace for the onset of Hurricane Irma.

Tax filing relief

On Aug. 29, 2017, the IRS announced that affected taxpayers who reside or have a business in designated disaster areas in the state of Texas will receive tax filing relief. To qualify, individuals must be residents or business owners in the Texas counties of Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria, Wharton, Colorado, Fayette, Hardin, Jasper, Jefferson, Montgomery, Newton, Orange, Sabine, San Jacinto, or Waller.

Affected individuals who have tax returns due on or after Aug. 23, 2017, and before Jan. 31, 2018, now have until Jan. 31, 2018, to file their 2016 returns. The relief also includes the filing of Form 5500, providing an automatic extended deadline of Jan. 31, 2018. The IRS will automatically apply filing and any penalty relief to affected taxpayers located in the disaster areas. Others harmed but not in the affected areas must contact the IRS to request relief.

Specifics of the regulation

To qualify for the tax relief and be considered an affected taxpayer, one or more of the following conditions must apply:

  • The taxpayer must reside in one of the covered disaster-area counties, listed above.
  • The place of business must be in the covered disaster area.
  • The records necessary to file taxes are in the covered disaster area.
  • The individual is a relief worker of a recognized government or philanthropic organization assisting in the covered disaster area.
  • The individual was visiting in the covered disaster area and was killed or injured as a result of the hurricane.

You can read the complete IRS regulation on the agency's website.

Loan and hardship relief for employers

On Aug. 30, 2017, the IRS announced it will provide tax filing relief to employers who are responsible for filing a Form 5500 by Oct. 16, 2017, for their company's retirement plan. The relief automatically extends the Form 5500 filing deadline to Jan. 31, 2018, for businesses located in the areas designated by the Federal Emergency Management Agency (FEMA) as qualifying for either individual assistance or public assistance due to impacts from Hurricane Harvey. (The FEMA website lists areas of Texas currently eligible for relief by county.)

In addition, the IRS relaxed the procedural and administrative rules for loans and hardship distributions requested from employer retirement plans. Eligible plan participants will have quicker access to their money as they seek to recover from Hurricane Harvey. In addition, participants will be able to continue retirement plan contributions immediately after the hardship distribution. Retirement plans may provide this relief to employees and certain members of their families who live or work in the designated hurricane disaster areas.

Therefore, a participant who lives outside the FEMA disaster area can take out a retirement plan loan or hardship distribution and use it to assist a child, parent, grandparent, or other dependent who lived or worked in the FEMA disaster area. To qualify for this relief, an individual must make a hardship distribution request due to Hurricane Harvey by Jan. 31, 2018.

Remember that money withdrawn from a retirement account is taxed if participants are under a certain age. The IRS emphasizes that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if borrowers repay them within five years or less. Under current law, hardship distributions are generally taxable and subject to a 10 percent early-withdrawal tax.

Specifics of the regulation

  • The relief applies to Internal Revenue Code 401(a) plans (including 401(k), 403(a) and 403(b) plans and governmental 457 (b) plans.
  • The relief applies to hardship distributions and loans executed between Aug. 23, 2017 and Jan. 31, 2018.
  • Relief applies to employees and certain members of their families who live or work in FEMA-designated disaster areas affected by Hurricane Harvey.
  • Plans that do not currently offer loans or hardship distributions may allow them immediately and retroactively amend their plan documents no later than Dec. 31, 2018 (for calendar-year plans).
  • The relief provided by this announcement applies to any hardship of the employee, not just the types outlined in the regulations.
  • Plan hardship and loan documentation requirements (e.g., reason and/or amount, spousal consent) can be temporarily suspended to expedite account access, but must be completed as soon as practicable.
  • Deferrals are NOT required to be suspended for six months following a hardship taken under this relief.
  • The 10 percent additional tax for early distributions applies.

You can read the complete IRS regulation on the agency's website.

Businesses need to address Hurricane Harvey's impact for the long term

The population of Houston and greater southeast Texas will feel Hurricane Harvey's impact for years to come. Tens of thousands are now homeless, businesses will be shuttered for indeterminate periods, and countless citizens are out of work. The two IRS regulations offering tax filing relief to individuals and business owners, and loan and hardship relief to employers, will help some. But companies in the disaster area face considerable challenges in pay and work obligations to their staffs to avoid long-term consequences.

About the Author

Jessica Curtin, QKA, CPFA, TGPC, Retirement, FSA, and HSA Compliance Analyst

Jessica joined the Compliance Risk organization of Paychex in October 2016 as a Retirement, FSA, and HSA Compliance Analyst. In this role, she is responsible for regulatory compliance of the Paychex retirement and Section 125 products, government and industry group relations, and business partner consulting. 

Before joining Paychex, Jessica was an Account Manager at EPIC Advisors, a Rochester, NY-based 401(k) provider with a niche in the banking industry. Prior to this role, she worked as an Enroller and also a Client Service Specialist at EPIC.

Jessica received her BS in Finance from Rochester Institute of Technology, and also holds the ASPPA designations of Qualified 401(k) Administrator (QKA), Certified Plan Fiduciary Advisor (CPFA), and Tax Exempt and Governmental Plan Consultant (TGPC).

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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