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Defined Contribution

Plans ease burden for hurricane victims

Hardship rules relaxed for stricken participants

Jack Towarnicky said many participants have only the 401(k).

From the $11 million 401(k) plan of Custom Air Products & Services Inc. to the $511 billion federal Thrift Savings Plan, defined contribution plans in hurricane-hit areas have stepped up communication to participants and incorporated temporarily relaxed rules and/or waivers from the Internal Revenue Service, Department of Labor and other agencies.They are helping participants affected by hurricanes Harvey and Irma find money to deal with the dramatic jolts from natural disasters while also encouraging them to retain their retirement savings.

At the same time, all plan executives — not just those affected by the most recent natural disasters — are being urged to get ready for the next disaster by preparing communications, human resources and plan-management strategies.

"We want plans to be proactive rather than reactive," said Jack Towarnicky, executive director of the Plan Sponsor Council of America, Chicago.

PSCA has been fielding calls from members and has guidelines, recommendations and government agency contact information on its website. The PSCA website points out that retirement funds are "typically not only the last resort but the only resort."

Member calls to PSCA have revealed that "many people are living payday to payday," Mr. Towarnicky said. "They didn't have a lot of money to deal with emergencies."

Noting that many plans are looking at "short-term answers," Mr. Towarnicky said there was a "big difference between plans that had prepared — maybe due to past experience — and the sponsors that hadn't anticipated these kinds of disasters."

In guidance documents for hurricane-affected plans, the IRS said it was "relaxing procedural and administrative rules that normally apply" to loans and hardship withdrawals so participants could "access their money more quickly with a minimum of red tape."

Qualified plans can offer loans totaling up to 50% of a participant's account balance or $50,000 whichever is less. These guidelines haven't changed due to the hurricanes. Permitted uses for loans are set up by plan sponsors and loans aren't dependent on hardship.

Qualified plans can offer participants standard hardship withdrawals based on what the IRS calls "immediate and heavy financial need," which is to be determined by an employer. The amount is limited to the specific financial need, which, under IRS safe harbor rules, can include tuition, prevention of eviction, funeral expenses, purchase of a primary residence and damage repair to a primary residence.

Hardship withdrawals may be made when an employee "couldn't reasonably obtain the funds from another source," says the IRS. For standard hardship withdrawals, participants in 401(k) and 403(b) plans cannot contribute at all to their accounts for six months after taking a hardship withdrawal.

However, the IRS issued guidelines on Aug. 30 for victims of Hurricane Harvey and on Sept. 12 for victims of Hurricane Irma temporarily suspending the six-month ban. The withdrawals can be made for food and shelter — uses typically prohibited — by participants affected by the hurricanes, the IRS said. The Custom Air Products 401(k) Plan is allowing hardship withdrawals for the first time, said Robert Love, chief financial officer of the Houston-based company whose plan covers 200 people.

Prior to Hurricane Harvey, the company had allowed participants to take one loan against their 401(k), which must be paid off before requesting a second loan.

Mr. Love said his company preferred the loan over a withdrawal as a way to "keep people in the plan" by being eligible for continued contributing.

After Hurricane Harvey tore through Houston in August, Mr. Love said company executives considered offering hardship withdrawals. "The IRS (waiver) announcement hit the nail on the head for us," said Mr. Love. "The IRS opened flexibility for our plan."

Hardship withdrawals

The plan recently announced the availability of hardship withdrawals, using managers and supervisors to alert employees. This temporary policy is restricted to damage caused by Hurricane Harvey.

The plan also is temporarily allowing participants to take two loans against their 401(k) balances. Officials will discuss any future loan policy with the plan's administrator, adviser and PSCA "for best practices," Mr. Love said.

The Federal Thrift Savings Plan, with more than 5 million participants, has dealt with the aftermath of multiple natural disasters over the years — including hurricanes Katrina, Harvey and Irma, and super storm Sandy.

In each instance, "we have relaxed the hardship withdrawal per guidance from the IRS," said spokeswoman Kim Weaver. That means lifting the contribution ban after a withdrawal for a hurricane-related hardship.

TSP sent participants a notice Sept. 13 showing employees affected by Hurricane Irma how to fill out a hardship withdrawal form, making sure they cite the hurricane as the reason.

Participants must make a request by Jan. 24 and distributions must be made by Jan. 31. The TSP will not grant retroactive relaxation of the IRS rule barring participants who take a hardship withdrawal from contributing to the plan for six months.

Participants seeking a Hurricane Irma-based hardship withdrawal must prove their primary residence or place of employment is "located in a covered disaster area and has incurred a loss as a result of Hurricane Irma," the TSP notice said. The TSP sent a similar notice Sept. 1 regarding participants affected by Hurricane Harvey.

A TSP participant also could be eligible for a hardship withdrawal if the money "will be used to assist an eligible family member who lives or works in a covered disaster area and who has incurred a loss as a result of Hurricane Irma," the TSP notice said. (A similar policy applies to those affected by Hurricane Harvey.) "Participants may only receive one hardship withdrawal under this change."

Ms. Weaver said the TSP loan policy hasn't changed due to the hurricanes. Participants can take one general purpose loan — to be repaid within five years — and one residential purpose loan, to be repaid within 15 years.

After Hurricane Harvey, the Employees Retirement System of Texas, Austin, worked with Empower Retirement, record keeper for the Texa$aver 457 plan and 401(k) plan, to streamline the process for approving loans and hardship withdrawals, said Nora Alvarado, manager of health and welfare administration and deferred compensation. "This is typical for what we do in a natural disaster," she said.

The usual time for expediting approval of a hardship withdrawal from the $2.1 billion 401(k) plan or the $742 million deferred compensation plan is five to seven days; but the process took two to three days after Hurricane Harvey, she said, and Empower waived fees.

Extended call center hours

Empower extended its call center hours to answer participant questions, and the Texa$aver website added a pop-up notice providing contact information for participants affected by Hurricane Harvey.

Although unaffected by the recent hurricanes, Beth Kushner is quite familiar with a natural disaster's impact on employees and plan participants in her role as deputy director for administration, Employee Benefits Program, City of New York Office of Labor Relations. The city sponsors a $16 billion deferred compensation plan, a $2.6 billion 401(k) plan and a $300 million Deemed IRA plan, in which participants can roll over money into an IRA administered by the deferred compensation plan.

When New York City was hit by Superstorm Sandy in October 2012, plan officials made sure loan and hardship applications were processed "without delay," said Ms. Kushner, even though mail service was affected by the storm and the plan's Manhattan headquarters wasn't usable for nearly three months. Plan executives also set up walk-in centers at various city locations, including fire stations and police stations.

The city didn't change its policy for loans or hardship withdrawals but was able to act faster thanks to guidance from the IRS about relaxing certain procedural and administrative rules, she said.

"We dedicated several staff to review hardship requests as soon as they came in," she said. "They would prepare the case as well as reach out to participants via the phone and in-person to help expedite the process. Applications were processed as soon as they were received."