Author: jfortenberry@fortenberrylaw.com

What follows is a more detailed summary of KETRA’s provisions pertaining to retirement plans, as taken from the JCT’s Technical Explanation of H.R. 3768, The “Katrina Emergency Tax Relief Act of 2005” as passed by the House and the Senate on September 21, 2005. If you want to compare the summary with the text of the legislation, you can access the text of the legislation here (from the Ways and Means Committee web page devoted to KETRA).

1. Tax-Favored Withdrawals from Retirement Plans for Relief Relating to Hurricane Katrina (sec. 101 of the bill):

The provision provides an exception to the 10-percent early withdrawal tax in the case of a qualified Hurricane Katrina distribution from a qualified retirement plan, a 403(b) annuity, or an IRA. In addition, as discussed more fully below, income attributable to a qualified Hurricane Katrina distribution may be included in income ratably over three years, and the amount of a qualified Hurricane Katrina distribution may be recontributed to an eligible retirement plan within three years.

A qualified Hurricane Katrina distribution is a distribution from an eligible retirement plan made on or after August 25, 2005, and before January 1, 2007, to an individual whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina. The total amount of qualified Hurricane Katrina distributions that an individual can receive from all plans, annuities, or IRAs is $100,000. Thus, any distributions in excess of $100,000 during the applicable period are not qualified Hurricane Katrina distributions.

Any amount required to be included in income as a result of a qualified Hurricane Katrina distribution is included in income ratably over the three-year period beginning with the year of distribution unless the individual elects not to have ratable inclusion apply. Certain rules apply for purposes of the ratable inclusion provision. For example, the amount required to be included in income for any taxable year in the three-year period cannot exceed the total amount to be included in income with respect to the qualified Hurricane Katrina distribution, reduced by amounts included in income for preceding years in the period.

Under the provision, any portion of a qualified Hurricane Katrina distribution may, at any time during the three-year period beginning the day after the date on which the distribution was received, be recontributed to an eligible retirement plan to which a rollover can be made. Any amount recontributed within the three-year period is treated as a rollover and thus is not includible in income. For example, if an individual receives a qualified Hurricane Katrina distribution in 2005, that amount is included in income, generally ratably over the year of the distribution and the following two years, but is not subject to the 10-percent early withdrawal tax. If, in 2007, the amount of the qualified Hurricane Katrina distribution is recontributed to an eligible retirement plan, the individual may file an amended return (or returns) to claim a refund of the tax attributable to the amount previously included in income. In addition, if, under the ratable inclusion provision, a portion of the distribution has not yet been included in income at the time of the contribution, the remaining amount is not includible in income.

A qualified Hurricane Katrina distribution is a permissible distribution from a 401(k) plan, 403(b) annuity, or governmental 457 plan, regardless of whether a distribution would otherwise be permissible. A plan is not treated as violating any Code requirement merely because it treats a distribution as a qualified Hurricane Katrina distribution, provided that the aggregate amount of such distributions from plans maintained by the employer and members of the employer’s controlled group does not exceed $100,000. Thus, a plan is not treated as violating any Code requirement merely because an individual might receive total distributions in excess of $100,000, taking into account distributions from plans of other employers or IRAs.

Under the provision, qualified Hurricane Katrina distributions are subject to the income tax withholding rules applicable to distributions other than eligible rollover distributions. Thus, 20-percent mandatory withholding does not apply.

2. Recontributions of Withdrawals for Home Purchases Cancelled Due to Hurricane Katrina (sec. 102 of the bill):

In general, under the provision, a distribution received from a 401(k) plan, 403(b) annuity, or IRA in order to purchase a home in the Hurricane Katrina disaster area may be recontributed to such a plan, annuity, or IRA in certain circumstances.

The provision applies to an individual who receives a qualified distribution. A qualified distribution is a hardship distribution from a 401(k) plan or 403(b) annuity, or a qualified firsttime homebuyer distribution from an IRA: (1) that is received after February 28, 2005, and before August 29, 2005; and (2) that was to be used to purchase or construct a principal residence in the Hurricane Katrina disaster area, but the residence is not purchased or constructed on account of Hurricane Katrina.

Under the provision, any portion of a qualified distribution may, during the period beginning on August 25, 2005, and ending on February 28, 2006, be recontributed to a plan, annuity or IRA to which a rollover is permitted. Any amount recontributed is treated as a rollover. Thus, that portion of the qualified distribution is not includible in income (and also is not subject to the 10-percent early withdrawal tax).

3. Loans from Qualified Plans for Relief Relating to Hurricane Katrina (sec. 103 of the bill):

The provision provides special rules in the case of a loan from a qualified employer plan to a qualified individual made after the date of enactment and before January 1, 2007. A qualified individual is an individual whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina.

Under the provision, the exception to the general rule of income inclusion is provided to the extent that the loan (when added to the outstanding balance of all other loans to the participant from all plans maintained by the employer) does not exceed the lesser of (1) $100,000 reduced by the excess of the highest outstanding balance of loans from such plans during the one-year period ending on the day before the date the loan is made over the outstanding balance of loans from the plan on the date the loan is made or (2) the greater of $10,000 or the participant’s accrued benefit under the plan.

Under the provision, in the case of a qualified individual with an outstanding loan on or after August 25, 2005, from a qualified employer plan, if the due date for any repayment with respect to such loan occurs during the period beginning on August 25, 2005, and ending on December 31, 2006, such due date is delayed for one year. Any subsequent repayments with respect to such loan shall be appropriately adjusted to reflect the delay in the due date and any interest accruing during such delay. The period during which required repayment is delayed is disregarded in complying with the requirements that the loan be repaid within five years and that level amortization payments be made.

4. Provisions Relating to Plan Amendments in Connection with Hurricane Katrina (sec. 104 of the bill):

The provision permits certain plan amendments made pursuant to the changes made by the provisions of Title I of the bill, or regulations issued thereunder, to be retroactively effective. If the plan amendment meets the requirements of the provision, then the plan will be treated as being operated in accordance with its terms. In order for this treatment to apply, the plan amendment is required to be made on or before the last day of the first plan year beginning on or after January 1, 2007, or such later date as provided by the Secretary of the Treasury. Governmental plans are given an additional two years in which to make required plan amendments. If the amendment is required to be made to retain qualified status as a result of the changes made by Title I of the bill (or regulations), the amendment is required to be made retroactively effective as of the date on which the change became effective with respect to the plan, and the plan is required to be operated in compliance until the amendment is made. Amendments that are not required to retain qualified status but that are made pursuant to the changes made by Title I of the bill (or regulations) may be made retroactively effective as of the first day the plan is operated in accordance with the amendment. A plan amendment will not be considered to be pursuant to changes made by Title I of the bill (or regulations) if it has an effective date before the effective date of the provision under the bill (or regulations) to which it relates.

CCH has published a good summary of KETRA’s provisions as well as IRS Katrina relief provided here.

RIA is reporting:

Late on Tuesday, September 20, House and Senate negotiators reached agreement on H.R. 3768, the “Katrina Emergency Tax Relief Act of 2005” (KETRA). On Wednesday, September 21, the House approved the measure by a unanimous vote, and late in the evening of Wednesday, September 21, the Senate passed it by unanimous consent. The President is expected to sign the measure into law.

Summary of Employment and Benefits-Related Provisions Taken from the Committee on Ways and Means Summary of the House-Senate Agreement:

Waives 10-percent tax on early distributions from IRAs and pensions for individuals affected by the hurricane. In general, distributions from IRAs and pensions are subject to a 10-percent penalty if they are made before a certain age. The penalty is intended to discourage individuals from withdrawing funds that are needed for retirement. To ease the financial burden faced by many families in the disaster area, the proposal allows eligible individuals to withdraw a maximum of $100,000 from their IRAs and pensions without paying the 10-percent penalty. Individuals eligible for the waiver may pay income tax on the distribution over three years. Income tax is not due if the distribution is repaid to the account within three years. The proposal also increases the limit on loans from pension plans from $50,000 to $100,000.

Provides an Employee Retention Tax Credit. Small employers located in a disaster area that is eligible for individual and public assistance under the Stafford Act may claim a tax credit through the end of the 2005 calendar year if they retain an eligible employee on their payroll. The tax credit equals 40 percent of the first $6,000 of wages paid to the employee between August 28, 2005 and January 1, 2006. The credit is available to small employers (i.e., an average of 200 or fewer employees in the taxable year) whose business is inoperable as a result of damage sustained by Hurricane Katrina. The credit is not affected if the employee reports to work at another location while the business is inoperable.

Extends deadlines for paying excise and employment taxes. The IRS has taken administrative action to extend the deadlines for filing tax returns and making tax payments until January 3, 2006. These extensions apply to income, estate and gift taxes for those affected by Hurricane Katrina. The proposal extends the deadline until February 28, 2006. The proposal also applies this extension to excise taxes and employment taxes, in addition to income, estate and gift taxes.

Comment: The text of the legislation provides that Section 72(t) of the Code shall not apply to any “qualified Hurricane Katrina distribution” not exceeding $100,000. A ‘‘qualified Hurricane Katrina distribution’’ is defined as “any distribution from an eligible retirement plan made on or after August 25, 2005, and before January 1, 2007, to an individual whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina.” “Eligible retirement plan” is defined in section 402(c)(8)(B) of the Code (which includes qualified plans, IRAs, 403(b)’s, and 457 plans).

You can access the text of the legislation here: Legislative Text of House-Senate Agreement on H.R. 3768 (September 21, 2005).

Treasury Secretary Snow’s Remarks From a Press Release issued this afternoon:

I commend Senate and House negotiators for reaching bipartisan agreement on the Hurricane Katrina emergency tax relief bill. I am pleased that the House acted to pass the bill this afternoon and look forward to quick Senate action. This aid comes at exactly the right time to help victims of Hurricane Katrina as they rebuild their lives. Hurricane Katrina was a devastating blow to our Gulf Coast and this aid package will be an important part of the recovery effort.

The IRS also issued this News Release: IRS Updates Hurricane Katrina Tax Relief Guidelines for Taxpayers in Four States, Relief Workers and Others Impacted. Excerpt:

With recovery efforts well underway from Hurricane Katrina, the Internal Revenue Service announced today additional details to help ensure that those impacted by the storm get the tax relief to which they are entitled. Notice 2005-73, also released today, has full details regarding the relief.

Taxpayers affected by the hurricane may be eligible for tax relief, regardless of where they live. Deadlines for affected taxpayers to file any returns, pay any taxes and perform other time-sensitive acts have been postponed to Jan. 3, 2006.

In the hardest-hit areas — those designated by FEMA as “individual assistance areas” — the tax relief will be automatic, and taxpayers won’t need to do anything to get the extensions and other relief available. In areas where FEMA has determined damage is more isolated — designated as “public assistance areas” — or for other taxpayers outside the impacted area, people will need to identify themselves as hurricane victims when filing with the IRS.

In conjunction with the News Release, the IRS issued Notice 2005-73 which summarizes and clarifies the relief previously granted by the Internal Revenue Service under sections 6081, 6161, 6656, and 7508A of the Code with respect to taxpayers affected by Hurricane Katrina. The Release also mentions Rev. Proc. 2005-27 which contains a list of 32 employee benefit issues (pg. 1058 of the Bulletin) that are automatically impacted whenever there is a Presidentially declared disaster. (Important to know if Hurricane Rita continues along the path that has been predicted.)

Statement of Assistant Secretary Ann L. Combs:

The Department, in conjunction with IRS Announcement 2005-70, provided guidance to facilitate hardship and loan distributions to participants and beneficiaries affected by Hurricane Katrina. In addition to the distribution issues addressed in the IRS Announcement, the Employee Benefits Security Administration has received inquiries concerning the application of rules governing participant contributions and loan repayments and the furnishing of blackout notices to employers and plans in areas affected by the Hurricane.

EBSA realizes that, due to this natural disaster, there may be instances when full compliance may not be possible. The guiding principle must be to ensure that appropriate efforts are made to act reasonably, prudently and in the interest of the workers and their families, who rely on their health, pension and other benefits for their physical and economic well-being.

The guidance provided in this statement applies to employers, plan sponsors, as well as service providers to such employers, and plans located in counties and parishes in Louisiana, Mississippi, or Alabama that have been or are later designated as disaster areas eligible for Individual Assistance by the Federal Emergency Management Agency because of the devastation caused by Hurricane Katrina.

EBSA 9/20 News Release, U.S. Labor Department Extends Time and Areas Covered by Reporting Relief for Areas Hit by Hurricane Katrina:

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) today announced additional time has been granted to Jan. 3, 2006, for filing deadline of Form 5500 and Form 5500 EZ annual report/returns for employee benefit plans affected by Hurricane Katrina.

EBSA 9/19 News Release, U. S. Labor Department Helps Hurricane Katrina Victims Preserve Health Benefits with Fact Sheet:

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA), in conjunction with the Internal Revenue Service, announced an extension of a number of deadlines related to health plan coverage, giving workers and employers affected by Hurricane Katrina additional time to make critical decisions regarding health coverage.

“We want to make sure that hurricane survivors don’t lose health coverage or other important benefits because they were unable to meet the normal deadlines,” said Secretary of Labor Elaine L. Chao. “This is part of the President’s promise to cut through red tape to help Hurricane Katrina survivors and their families resume their lives.”

The relief provides additional time to comply with certain deadlines contained in the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Health Insurance Portability and Accountability Act (HIPAA) and the rules for processing of health claims.

From the Tax Prof Blog here: 1040-LOST: 30,000 Tax Payments Floating in Pacific Ocean. Professor Maule offers information here on what to do if you are located in one of the states from which the payments came, i.e. Alaska, California, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Virginia, Washington, and Wyoming.

More from the Tax Guru here.

The Tax Prof Blog has compiled a very useful list of links here relating to recent Katrina Tax Relief legislation, which includes the following:

• Senate Passes S.1696, Hurricane Katrina Tax Relief Act of 2005 (9/15)
• House Passes H.R. 3786, Hurricane Katrina Emergency Tax Relief Act of 2005 (9/15)
• Summary of H.R. 3786, Hurricane Katrina Emergency Tax Relief Act of 2005 (9/15)
• Joint Committee on Taxation, Technical Explanation of H.R. 3786, The "Katrina Emergency Tax Relief Act Of 2005" (JCX-64-05) (9/15)
• Joint Committee on Taxation, Estimated Revenue Effects of H.R. 3786, The "Katrina Emergency Tax Relief Act Of 2005" (JCX-65-05) (9/15)
• Remarks of Senator Chuck Grassley of Iowa Chairman of the Committee on Finance News Conference regarding Emergency Tax Relief for Hurricane Katrina Victims (9/12)
• Statement of U.S. Senator Max Baucus on Hurricane Katrina Relief Package (9/12)
• Summary of Grassley-Baucus Tax Relief Package for Individuals Affected by Hurricane Katrina (9/12)
• Baucus Outlines Hurricane Katrina Relief Package (9/7)

Posts will resume here hopefully next week or very soon thereafter.

From the TaxProf Blog (posted on September 2nd):

Leonidas Ralph Mecham, Director of the Admnistrative Office of the United States Courts, yesterday sent this Memorandum to All Chief Judges on the Impact of Hurricane Katrina on the Federal Courts. The memorandum sets forth the status of the federal courts affected by Katrina:

• The U.S. Court of Appeals for the 5th Circuit in New Orleans is closed and may move its operations temporarily to Houston.
• The U.S. District Court for the Eastern District of Louisiana is closed and plans to activate its Continuity of Operations Plan, provided legislation is enacted allowing it to hold court outside the district.
• The U.S. District Court for the Southern District of Alabama is closed.
• The U.S. District Court for the Southern District of Mississippi is closed.

More info on the 5th Circuit here.

Here is a summary of some of the agency relief provided for plan sponsors and employers affected by Hurricane Katrina:

DOL Relief:

Extension of the deadline for filing Form 5500 and Form 5500 EZ annual report/returns for certain parishes and counties in Alabama, Mississippi, and Louisiana. Excerpt from the Releases:

Under this relief, Form 5500 series filings required to be filed between Aug. 29, 2005, and Oct. 31, 2005, are granted an extension until Oct. 31, 2005. Plan filers entitled to an extension of relief should check Part I, Box D, on the Form 5500 or Part 1 on Form 5500-EZ and attach a statement to the form in accordance with the instructions.

The agencies — EBSA, Internal Revenue Service and Pension Benefit Guaranty Corporation — realize that, due to this natural disaster, there may be instances when full compliance may not be possible. The guiding principle must be to ensure that appropriate efforts are made to act reasonably, prudently, and in the interest of the workers and their families who rely on their health, pension and other benefits for their physical and economic well-being.

IRS Relief:

The Internal Revenue Service has provided special relief for taxpayers in the Presidential Disaster Areas struck by Hurricane Katrina. These taxpayers generally will have until Oct. 31, 2005, to file tax returns and submit tax payments. The IRS will abate interest and any late filing or late payment penalties that would otherwise apply. This relief includes the Sept. 15 due date for estimated taxes and for calendar-year corporate returns with automatic extensions. See IR-2005-84 and also IR-2005-91.

This link here indicates that the “extension to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, to Forms 1042-S or 8027, or to employment and excise tax deposits.” The web page goes on to indicate that that the “IRS may abate penalties on such deposits for affected taxpayers due to reasonable cause during the FTD Penalty Waiver Period, provided they make the payment by the last day of that Period” and that “[t]axpayers whose specific disaster-related circumstances prevent them from making tax deposits within that Period may seek penalty abatements on a case-by-case basis.” Tax Relief: Presidentially Declared Disaster Areas

Also, with respect to minimum funding requirements, Notice 2005-60 (via Benefitslink.com) provides:

“For any plan that is affected by Katrina (an “Affected Plan”), if the date described in § 412(c)(10) or 412(m) of the Code and § 302(c)(10) or 302(e) of ERISA for making contributions falls within the period beginning on August 29, 2005, and ending on October 30, 2005, then the date such contributions must be made is postponed to October 31, 2005. If the date described in § 412(d)(4) of the Code and § 303(d)(1) of ERISA for applying for a waiver for an Affected Plan falls within the period beginning on August 29, 2005, and ending on October 30, 2005, then the date such waiver must be applied for is postponed to October 31, 2005.”

The IRS indicates in IR-2005-91 that “[f]or the hardest-hit areas, the IRS anticipates extending these deadlines even further in the near future.”

PBGC Relief:

For employers who sponsor defined-benefit pension plans in Louisiana, Mississippi and Alabama, the PBGC has announced extended deadlines for certain required filings, including premium payment filings, plan termination filings, participant notices, reportable events notices, and certain employer reporting for underfunded plans. The relief is for “Designated Persons” defined as “any person responsible for meeting a PBGC deadline (for example, a plan administrator or contributing sponsor) that (1) is located in a disaster area for which the IRS has provided relief in IR-2005-84, Aug. 30, 2005, in connection with filing extensions for Form 5500 series returns, or (2) cannot reasonably obtain information or other assistance needed to meet the deadline from a service provider, bank, or other person whose operations are directly affected by Hurricane Katrina.” Employers may call 1-800-736-2444 or 202-326-4242. PBGC Public Affairs, 202-326-4040

SHRM has a helpful resource page here.

UPDATE: The Department of Health and Human Services has issued a Bulletin entitled “HIPAA Privacy and Disclosures in Emergency Situations.” The purpose of the Bulletin is to “emphasize how the HIPAA Privacy Rule allows patient information to be shared to assist in disaster relief efforts, and to assist patients in receiving the care they need.” (Source: American Health Lawyers Association)

Also, the Texas Supreme Court has issued an Advisory announcing that “Texas will permit lawyers from Louisiana, Mississippi or Alabama to practice law from Texas locations.” (Source: American Health Lawyers Association)

FURTHER UPDATE: The Department of the Treasury and Internal Revenue Service officials have announced special relief intended to support leave-based donation programs to aid victims who have suffered from the extraordinary destruction caused by Hurricane Katrina. Under these programs, employees can donate their vacation, sick or personal leave in exchange for employer cash payments made to qualified tax-exempt organizations providing relief for the victims of Hurricane Katrina. Under Notice 2005-68, employees can forgo leave in exchange for employer cash payments made before January 1, 2007, to qualified tax-exempt organizations providing relief for Hurricane Katrina victims. Employees do not have to include the donated leave in their income. Employers will be permitted to deduct the amount of the cash payment.

FURTHER UPDATE: The Treasury Department and IRS announced that 401(k) plans and similar plans, such as those under section 403(b), will be permitted to make loans and hardship distributions to victims of Hurricane Katrina. From the press release: “Today’s action will allow those devastated by Hurricane Katrina access to much-needed money as they work to rebuild their lives,” stated Treasury Secretary John Snow.? “I also applaud action taken in the House and Senate today to provide tax relief to Katrina victims and to allow these withdrawals to be made without penalty.” The relief is generally available now through March 31, 2006.?See IRS Announcement 2005-70.