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."