Last fall, in response to Hurricanes Katrina, Rita and Wilma, Congress enacted two laws which provide relief to taxpayers whom the hurricanes adversely impacted. The first law, the Katrina Emergency Tax Relief Act of 2005 ("KETRA"), provides relief to individuals and businesses that Hurricane Katrina adversely impacted. The second law, The Gulf Opportunity Zone Act of 2005 ("GO Zone"), expands the relief provided under KETRA to those individuals and businesses that Hurricanes Rita and Wilma adversely impacted. The relief under KETRA and GO Zone is in addition to the relief certain federal agencies previously provided, as discussed in our September 2005, Employee Benefits and Executive Compensation Update article titled "Hurricane Katrina Relief."

This article summarizes the employee benefit plan provisions of KETRA, as expanded by GO Zone, as well as certain administrative relief provided by the Internal Revenue Service, the U.S. Department of Labor and the Pension Benefit Guaranty Corporation for employee benefit plans and their participants whom the hurricanes adversely impacted.

Qualified Individuals

In order to qualify for the relief offered under KETRA and GO Zone, a taxpayer must be a "qualified individual." A "qualified individual" is defined as:

• a taxpayer whose principal place of abode was in the Hurricane Katrina disaster area on August 28, 2005 and who sustained an economic loss from Hurricane Katrina;
  
  
• a taxpayer (other than a qualified Hurricane Katrina individual) whose principal place of abode was located in the Hurricane Rita disaster area on September 23, 2005 and who sustained an economic loss from Hurricane Rita; or
  
  
• a taxpayer (other than a qualified Hurricane Katrina individual or a qualified Hurricane Rita individual) whose principal place of abode was located in the Hurricane Wilma disaster area on October 23, 2005 and who sustained an economic loss from Hurricane Wilma.
  

An economic loss is damage or destruction of property from flooding, wind, vandalism and other causes, loss related to displacement from a personal residence or loss of livelihood due to temporary or permanent layoffs.

Loan Limits and Loan Repayment Provisions Relaxed

Qualified retirement plan loan limits are increased for victims of the Hurricanes.

For victims of the hurricanes, the new laws increase the maximum loan amount available. Generally, loans from qualified retirement plans are limited to the lesser of (1) $50,000 or (2) the greater of (i) $10,000 or (ii) one-half of the vested account balance under the plan. The new laws permit plans to provide that for any loan from a qualified retirement plan to a qualified individual that is made before January 1, 2007 and after September 23, 2005 for Katrina victims or after December 20, 2005 for Rita and Wilma victims, the "$50,000" limit is increased to "$100,000" and the "one-half" of the vested account balance limit is increased to "100%" of the vested account balance. Thus, under the new laws, loans from qualified retirement plans to a qualified individual during these time periods are limited to the lesser of (1) $100,000 or (2) the greater of (i) $10,000 or (ii) one-hundred percent of the qualified individual’s vested account balance under the plan.

Loan repayment periods are extended for one year.

If a qualified individual has an outstanding loan with any repayment due on a date that falls before January 1, 2007 and after August 24 (for Katrina victims), September 22 (for Rita victims) or October 22, 2005 (for Wilma victims), the due date may be delayed for one year if the sponsoring employer chooses to permit such delay. Any subsequent repayments with respect to the loan shall be appropriately adjusted to reflect the delay in the due date and any interest accruing during such delay. This one-year extension will not violate the requirement that loans be repaid within 5 years (or longer for the acquisition of a principal residence).

Qualified Hurricane Distributions Created

Generally, a participant who receives a distribution from a qualified retirement plan before he or she attains age 59½ is subject to a 10% excise tax on the distribution. The new laws waive the 10% excise tax if a distribution is considered a "qualified hurricane distribution." A distribution is considered as qualified if it is made to a qualified individual after August 24 (for Katrina victims), September 22 (for Rita victims) or October 22, 2005 (for Wilma victims) and before January 1, 2007. Features of a qualified hurricane distribution include the following:

• certain distributions from a plan are not treated as qualified hurricane distributions (e.g., corrective distributions from a 401(k) plan);
  
  
• the waiver of the 10% excise tax is limited to qualified hurricane distributions of up to $100,000;
  
  
• the mandatory income and employment tax withholding rules applicable to eligible rollover distributions do not apply. Thus, a qualified hurricane distribution is subject to the elective withholding rules which require 10% of the distribution to be withheld unless the qualified individual elects for withholding not to apply;
  
  
• a qualified individual includes a qualified hurricane distribution in his or her income ratably over three years unless the qualified individual affirmatively elects to include the entire amount of the distribution in income when he or she receives the distribution;
  
  
• a qualified individual may re-contribute most qualified hurricane distributions (e.g., required minimum distributions to qualified individuals over age 70½ cannot be re-contributed) to the qualified retirement plan over a three-year period following receipt of the distribution, and such re-contributions will be treated as a tax-free rollover to the qualified retirement plan. More particularly, amounts that are re-contributed within the three-year period will not be includible in income in the year in which the distribution is received (e.g., if a qualified individual received a qualified hurricane distribution in 2005 and re-contributes it in 2007, the qualified individual may file an amended tax return requesting a refund for any taxes paid in 2005 and 2006 on the distribution); and
  
  
• the amount of the qualified hurricane distribution need not correspond to the amount of the economic loss the qualified individual sustained.
  

Re-Contribution of Withdrawals for Home Purchases

Generally, a participant may receive a hardship distribution under an IRC section 401(k) or 403(b) plan (if the plan permits hardship distributions) for costs directly relating to the purchase of a principal residence. If such amounts are distributed from the plan before the participant attains age 59½, such amounts are includible in the participant’s income and are also subject to a 10% excise tax.

The new laws allow a hardship distribution that (1) was received after February 28, 2005 and before August 29, 2005 for Katrina victims, before September 24, 2005 for Rita victims or before October 24, 2005 for Wilma victims and (2) was to be used to construct or purchase a principal residence in a hurricane disaster area to be re-contributed to the plan without the qualified individual having to include the hardship distribution in his or her income if the residence was not purchased or constructed on account of a hurricane. The qualified individual must re-contribute the amount by February 28, 2006 in order to receive such tax-free treatment. Thus, if a qualified individual received a hardship distribution to construct or purchase a principal residence, but was unable to purchase or construct the principal residence on account of a hurricane, the qualified individual would not be required to include the amount of the hardship distribution in income (nor would the 10% penalty apply), so long as the qualified individual re-contributes the hardship distribution to the plan by February 28, 2006. To qualify for this treatment, the qualified individual must file IRS Form 8915 "Qualified Hurricane Plan Distributions and Repayments" with his or her personal income tax return.

Plan Amendments

All employers whose qualified retirement plans make hardship distributions to hurricane victims must amend their plans by the end of the plan year beginning on or after January 1, 2007 (December 31, 2007 for calendar year plans) to provide hurricane victims the right to re-contribute certain hardship distributions to the plan. Employers may, but are not required to, take advantage of the extension on loan payment relief and increased loan limits to benefit their employees and permit the repayment extension and/or increased loan limit prior to amending their plans. Plan amendments to extend the loan repayment period and/or to increase a plan's loan limitation must be in place by the end of the plan year beginning on or after January 1, 2007. Furthermore, if a plan does not presently permit loans or hardship distributions, it may nevertheless make hardship distributions and loans consistent with the hurricane relief provisions so long as the plan is amended by the end of the first plan year beginning after December 31, 2006 (December 31, 2007 for calendar year plans).

Minimum Funding Extension for Pension Plans

Sponsoring employers of a pension plan subject to minimum funding requirements (e.g., a defined benefit plan or money purchase pension plan) have until February 28, 2006 to make certain minimum funding payments. This extended deadline is available if the payments were due after August 28, 2005 and the principal place of business of the sponsoring employer or the plan service provider (e.g., record keeper or actuary) at the time of Hurricane Katrina was located in any of the counties or parishes in Alabama, Louisiana or Mississippi that the federal government declared eligible for individual assistance disaster relief. No equivalent relief is provided to sponsoring employers of plans affected by Hurricanes Rita or Wilma.

Extension of Time Frames for Certain Procedures Applicable to Group Health Plans and Qualified Retirement Plans

For participants, beneficiaries, qualified beneficiaries and claimants who resided, lived or worked in a Katrina disaster area in Alabama, Louisiana or Mississippi on August 29, 2005, the time frames for the following are tolled for the period between August 29, 2005 and February 28, 2006:

• deadlines for participants to file claims or appeals of adverse benefit determinations under any ERISA-covered employee benefit plan (e.g., group health plans, qualified retirement plans, etc.);
  
  
• the 63-day break in coverage rule under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), which permits group health plans and group health insurance policy issuers to ignore prior creditable coverage after such break;
  
  
• the 30-day period for adding newly born or adopted children to group health plan coverage without a preexisting condition exclusion if the newly acquired child is enrolled within 30 days of birth or adoption;
  
  
• the 30-day HIPAA special enrollment rule under which employees must request enrollment in a group health plan within 30 days of a special enrollment trigger to be eligible for special enrollment;
  
  
• the 60-day continuation coverage election period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA");
  
  
• the due date for COBRA premium payments; and
  
  
• the deadline for an employee’s notification to the group health plan administrator of a COBRA qualifying event or of a disability determination.
  
  

For any employee benefit plan that was directly affected by Hurricane Katrina, there is a similar extension whereby the time frames for distributing HIPAA certificates of creditable coverage and COBRA election notices are tolled for the period between August 29, 2005 and February 28, 2006. An employee benefit plan will be considered directly affected if, on August 29, 2005, the principal place of business of the plan’s sponsoring employer, the office of the plan or plan administrator or the office of the primary record keeper servicing the plan was located in one of the disaster areas referred to above. This relief is not extended to taxpayers whom Hurricanes Rita or Wilma adversely impacted.

Form 5500 Filing Extension

Form 5500 filing deadlines for employee benefit plans affected by Hurricanes Katrina, Rita and Wilma have been extended to February 28, 2006. A plan is considered affected by a hurricane if the sponsoring employer or plan administrator is located in a hurricane disaster area or if the sponsoring employer or plan administrator is unable to obtain the necessary information from banks, insurance companies or service providers whose operations were directly affected by a hurricane. The extension until February 28, 2006 applies to Form 5500 series filings required to be filed after August 23 (for plans affected by Katrina’s destruction in Florida), August 28 (for all other plans affected by Katrina), September 22 (for plans affected by Rita) or October 22 (for plans affected by Wilma).

Deposits of Participant Contributions

The U.S. Department of Labor will not assert violations of the plan asset regulations if a deposit of participant contributions to a retirement plan (e.g., a 401(k) plan) is not made within the time period DOL Regulations require, if the temporary delay is attributable to Hurricane Katrina.

PBGC Relief

For employers who sponsor defined-benefit pension plans in the Hurricane Katrina, Rita or Wilma disaster areas, the Pension Benefit Guaranty Corporation ("PBGC") has extended deadlines for certain required filings and notices, including premium payment filings, plan termination filings, certain participant notices, reportable events notices and certain employer reporting for underfunded defined benefit pension plans.

The relief is available to "designated persons." A "designated person" is any person responsible for meeting a PBGC deadline (e.g., a plan administrator or contributing employer) that is located in a disaster area for which the Form 5500 filing deadline has been extended or (2) cannot reasonably obtain information or other assistance needed to meet the deadline from a bank, service provider or other person whose operations Hurricanes Katrina, Rita or Wilma directly affected. An example of relief the PBGC has granted is that the PBGC will treat as timely any premium filing required to be made after August 23 (for designated persons affected by Katrina’s destruction in Florida), August 28 (for all other designated persons affected by Katrina), September 22 (for designated persons affected by Rita) or October 22, 2005 (for designated persons affected by Wilma), so long as such filing is made by February 28, 2006; for any such filing, the PBGC will waive the applicable penalty, but not the applicable interest charge. Another example of relief is that the PBGC will treat as timely any post-reportable event notices required to be made after August 23 (for designated persons affected by Katrina’s destruction in Florida), August 28 (for all other designated persons affected by Katrina), September 22 (for designated persons affected by Rita) or October 22, 2005 (for designated persons affected by Wilma), so long as such notice is submitted by February 28, 2006. For pre-reportable event notices, the PBGC will grant relief where appropriate on a case-by-case basis.

The PBGC will also consider extensions or other relief on a case-by-case basis for circumstances not covered by the PBGC announcements issued to date.

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