Hurricane Guidance Scorecard
Rev. 12/01/05, E-mail Alert 2005-24

As we finalized this alert, the IRS issued Notice 2005-92,
providing guidance on KETRA Sections 101 and 103.

Due to the dramatic increase in the amount of information, we will be offering an eSeminar on this subject. Stay tuned for the announcement.

The differences between the guidance for the Katrina Emergency Tax Relief Act (KETRA) and the IRS/DOL and PBGC guidance are important to understand.

I. Background

• In general, relief takes two forms: that issued by the Agencies (IRS, DOL and PBGC) and that enacted by Congress.
  
• Agencies acted first with various relief from current tax and ERISA requirements. Congress followed by enacting the Katrina Emergency Tax Relief Act (KETRA).
  
• KETRA relief is more limited in scope, dealing primarily with distributions and plan amendments. However, it is more inclusive in the covered group, it applies to any taxpayer in a Federally declared Disaster Area.
  
• Agency relief covers additional issues, such as filing and contribution deadlines, but limits specific relief provided based on the type of assistance available to residents of a specific county or parish.
  
• KETRA is limited to areas affected by Hurricane Katrina only. The Agencies have provided relief for Katrina, Rita and Wilma.
  

II. IRS and DOL Relief

• The IRS-provided relief is described in Notices 2005-60, 2005-73 and 2005-84, Announcement 2005-70 and Information Releases 2005-84, 2005-88, 2005-91, 2005-96, 2005-105 and 2005-112. The IRS is promising additional relief that has not been issued as yet. All IRS releases may be found at IRS Tax Relief In Disaster Situations webpage.
  
• IRS relief applies in counties or parishes that are subject to the Presidential disaster declarations affecting Florida, Louisiana, Mississippi and Alabama. The Federal Emergency Management Agency (FEMA) has the right to designate whether the areas affected by the disaster are eligible for either “public” or “individual” assistance. The extent of the relief granted by the IRS will vary based on the assigned designation. The relief provided is not automatic, but is only available upon specific IRS action.
  
• Notice 2005-84 brings prior IRS guidance into conformance with KETRA by extending previously announced deadlines affecting such issues as contributions, loans, distributions and reporting to February 28, 2006.
  

III. Specific Agency Relief Issues

• Form 5500 – For those Plans with filing deadlines on or after August 29, 2005 (August 24, 2005 for Florida Counties), the filing deadline is extended to February 28, 2006. To qualify for the extension, the principal place of business of the plan sponsor or the plan administrator must either be located in a Katrina-declared disaster area or the filer is not able to obtain necessary information from a service provider that is located in a Katrina-related declared disaster area. In this case, a disaster area is any county or parish eligible for either “public” or “individual” assistance. In October 2005, a similar extension was granted to those portions of Louisiana and Texas that were affected by Hurricane Rita, and to the portions of Florida affected by Hurricane Wilma. Form 5500 Relief
  DOL Hurricane Recovery Assistance
• Minimum Funding Contributions – The deadline for making these contributions or to apply for a waiver has been extended for Katrina-affected plans until February 28, 2006, if the original deadline was on or after August 29, 2005. No equivalent relief was provided to plans affected by Hurricane Rita. To qualify for the extension, the principal place of business of the plan sponsor, the plan recordkeeper or the plan actuary at the time of Hurricane Katrina, had to be located in any of the parishes or counties that FEMA declared eligible for disaster relief. In this instance, the extension will apply only to those counties and parishes declared as eligible for “individual” assistance. (No county in Florida was declared eligible for this type of disaster relief due to Hurricane Katrina.)
  
• Hardship Distributions – Qualified plans, other than defined benefit and money purchase plans, may make hardship distributions for a need arising from Hurricane Katrina without violating the Internal Revenue Code or ERISA Title I. The plan administrator may rely upon representations of the employee as to the amount of the need of the distribution. The plan administrator may disregard otherwise applicable plan imposed procedural requirements as long as the plan administrator: (1) makes a good faith effort to comply with such requirements and (2) makes a reasonable effort to collect any foregone documentation as soon as possible thereafter. 401(k) plans do not have to follow safe-harbor hardship distribution rules when processing Katrina-related hardship withdrawals. Plan documents that do not currently permit hardship distributions will have to be amended no later than the last day of the 2006 plan year, if hardship withdrawals are made under this provision. This relief will apply to hardship distributions made on or after August 29, 2005, but not later than March 31, 2006, to employees and former employees whose principal place of employment at the time of Katrina was located in any of the counties and parishes in Alabama, Louisiana or Mississippi, FEMA declares eligible for “individual” assistance. In addition, under the IRS relief, a hardship withdrawal may be initiated by a plan participant on behalf of a lineal ascendant or descendant, dependent or spouse who had a principal place of residence or employment at the time of Katrina was in one of those designated counties or parishes. KETRA would change these rules (see below). No equivalent relief was provided for plans solely affected by Hurricane Rita or Wilma.
  
• Loans – Qualified plans may make plan loans for a need arising from Hurricane Katrina without violating the Internal Revenue Code or ERISA Title I. Plan administrators may disregard otherwise applicable plan-imposed procedural requirements. The same requirements as described above, that apply to hardship distributions, including the right to receive plan loans on behalf of lineal ascendants and descendents in the declared disaster area, and to retroactively amend the plan to permit loans, will apply in this instance. As with hardship withdrawals, the expanded plan loan relief is applicable only in areas that have been determined as eligible for “individual” assistance.
  
• HIPAA and COBRA Relief
  
• PBGC Premiums – The premium payment deadline has been extended until February 28, 2006. To qualify for this relief, the premium must have been otherwise due after August 29, 2005 (August 24 for Florida). The PBGC has granted similar relief for plans affected by Hurricane Rita where the county or parish has been determined to be eligible for either “public” or “individual” assistance.
  PBGC Releases: Katrina; Rita; Wilma
  

IV. Katrina Emergency Tax Relief Act (KETRA) Provisions

• Special Tax-Favored Distributions – Qualified plans and IRAs may make qualified distributions to certain participants who have sustained an economic loss due to Hurricane Katrina. Such distributions are not subject to the 10% excise tax on early distributions or the 20% withholding requirement applicable to qualified plans. Qualified Hurricane Katrina distributions are not subject to federal income tax to the extent they are repaid over the three-year period immediately following the distribution. An individual may not receive qualified Hurricane Katrina distributions in an amount exceeding $100,000. To qualify for the statutory relief, the distribution must have been made on or after August 25, 2005 and before January 1, 2007 to an individual whose principal place of abode was located in a Hurricane Katrina disaster area on August 28, 2005, and who has sustained an economic loss as the result of the storm. The relief provided by KETRA covers the entire area declared a Federal Disaster Area by President Bush, in this instance, the relief covers Florida. KETRA does not limit the amount that may be withdrawn to the loss amount; thus, someone with a $10,000 loss may obtain a $100,000 distribution assuming at least that amount was in their plan account at the time of the withdrawal request. However, KETRA does not extend the right to take tax-favored withdrawals to family members, as is available under the IRS guidance.
  
• Plan Loans – KETRA provides the option of larger loan limits and special repayment options available to Katrina-affected individuals. For example, the loan limit is increased to the lesser of $100,000 or 100% of the participant’s vested account balance for a loan to a qualified individual that is made after September 23, 2005 (effective date of the law), but before January 1, 2007. Also, for qualified individuals with loans outstanding on or after August 25, 2005, any repayment due date that falls during the period beginning on August 25, 2005 and ending on December 31, 2006, is delayed for one year. This period is also disregarded for purposes of determining the five-year maximum loan repayment period. KETRA applies this relief to the entire Disaster Area, including Florida.
  
• Amendments – The amendment period for adding the appropriate Hurricane Katrina provisions such as distributions and loans is the employers' 2007 Plan Year.
  
• Inconsistencies – The IRS provisions permit family members outside the Katrina disaster area to make distributions to help family members affected by Katrina. However, family members outside of the Katrina disaster area were not included in KETRA. Thus, family members whose principal place of abode was outside of the Katrina area on August 28, 2005 may not avail themselves of the KETRA provisions (such as waiver of the 10% penalty for an early distribution and increased loan amounts and the repayment of distributions or taxation spread over three years.)