As recovery efforts continue following the devastation wrought by Hurricane Katrina, affected employers face the daunting tasks of responding to the needs of displaced employees and reestablishing destroyed business operations. This article discusses some of the employee benefits issues that these employers may face in meeting those objectives as well as the relief provided or proposed by the Internal Revenue Service (“IRS”), the Department of Labor (“DOL”), the Pension Benefit Guaranty Corporation (“PBGC”) and Congress.
Employers are playing a critical role in helping their employees deal with the catastrophic losses they have suffered. They have implemented hotlines and websites to direct employees to various relief resources and have provided food and temporary housing for displaced employees. Some employers have also relocated employees and their families to other towns and cities where the employer maintains offices or worksites. In addition, affected employees have increasingly turned to their employer-sponsored employee assistance plans (“EAPs”) for counseling services to help them cope with their losses, and for referrals to financial and legal resources.
Some employers have also established leave-based donation programs for employees who wish to help victims. These programs enable employees to give up their vacation, sick or personal leave on a tax-free basis in exchange for cash donations by the employer to certain charitable organizations that provide relief to Hurricane Katrina victims. See IRS Notice 2005–68. Any such cash donation must be made prior to January 1, 2007, and will be tax deductible to the employer only.
Recognizing that displaced employees will be forced to rebuild their lives from scratch, many employers have provided financial relief to affected employees in the forms of tax-free “qualified disaster relief payments” under Section 139 of the Internal Revenue Code (“Code”) and/or loans with “below-market” interest rates. After the terrorist attacks of September 11, 2001, Congress added Section 139 to the Code to provide for the tax-free receipt of payments by individuals who have incurred expenses as a result of a qualified disaster (from terrorist or military action, a disaster declared by the President, etc.). This provision permits employers to help employees pay for reasonable and necessary personal, family, living and funeral expenses, or expenses to repair or rehabilitate a personal residence that has been damaged. Such payments will not be taxable to the employee to the extent that any such expense is not otherwise compensable by insurance or otherwise. See Revenue Ruling 2003–12. Employers have also extended loans with “below-market” interest rates to affected employees. Although the foregone interest on such “below-market loans” will ordinarily be taxable to the employee under Code section 7872, foregone interest will not be treated as imputed income to employees if the aggregate amount of loans between the employer and the employee do not exceed $10,000. A husband and wife are treated as one person for purposes of determining the aggregate amount of loans between an employee and an employer.
To encourage employees and their dependents to seek necessary medical care, some employers have temporarily waived employees’ share of the cost of health coverage, out-of-pocket costs such as copayments, deductibles and coinsurance, and/or requirements for prior authorization, primary care physician referrals and/or utilization review (in cooperation with their third party administrators, HMOs or insurance carriers, as applicable). If an employer provides health coverage through a provider network, the employer should check with its third party administrator, HMO or insurer to see if care received from an out-of-network provider will be covered at the “in-network” level. A number of carriers with provider networks in the disaster area have opted, for a limited period of time, to pay all claims at the “in-network” level regardless of the provider’s network-status.
Despite an employer’s decision to cover the entire cost of health plan coverage, we note that employees may still be required to pay for such coverage if their share of premiums is paid with pre-tax dollars under a Section 125 cafeteria plan. The IRS’s rules regarding midyear cafeteria plan election changes currently do not permit elections to be changed following the occurrence of a disaster. However, if the plan document of a Section 125 cafeteria plan provides for midyear election changes on account of a significant cost or coverage change, the plan may be able to change an affected employee’s election on this basis.
Agency Relief for Health Plans and Claims-Related Guidance
On September 21, 2005, the DOL and IRS jointly issued guidance tolling various HIPAA portability and COBRA deadlines to help affected individuals obtain health coverage and meet claims deadlines for all employee benefit plans. From August 29, 2005 to January 3, 2006, the following time periods will be tolled for Hurricane Katrina victims:
- HIPAA’s 63-day break in coverage period: For example, an employee who loses coverage on August 14, 2005 (14 days before Hurricane Katrina) would not incur a 63-day break in coverage until February 21, 2006 (14-day period prior to Hurricane Katrina + 49 days after January 3, 2006 = 63-day break in coverage);
- HIPAA’s 30-day special enrollment period following a loss of coverage: The employee described above will be able to exercise a special enrollment right as late as January 19, 2006 (14-day period prior to Hurricane Katrina + 16 days after January 3, 2006 = 30-day special enrollment period);
- HIPAA’s 30-day period to obtain creditable coverage without a preexisting condition exclusion for newly born or adopted children;
- COBRA 60-day election period: If the employee described above received a COBRA election notice on August 14, 2005, the employee could elect COBRA as late as February 18, 2006 (14-day period prior to Hurricane Katrina + 46 days after January 3, 2006 = 60 days to elect COBRA);
- COBRA premium due date (45 days for initial premium and 30 day grace period for subsequent premium payments): For example, if an individual was receiving COBRA and failed both to make her September 1 payment for September coverage, and payments for subsequent months because of Hurricane Katrina, she can make timely premium payments as late as February 2, 2006: 30 days after January 3, 2006 for coverage during September, October, November, December and January;
- The 60-day period for individuals to notify the plan of a qualifying event and the period for individuals to notify the plan of a Social Security Administration determination of disability;
- The date within which individuals must file a claim under a plan’s claims procedure (affects health plans, disability plans, other welfare plans, and retirement plans): For example, if a health plan requires participants to submit a claim within 365 days of receiving medical treatment and a participant incurs a claim on October 1, 2004, the 365-day claims filing period would be tolled from August 29, 2005 through January 3, 2006 and the participant would be able to submit his claim as late as February 6, 2006 (331-day period prior to Hurricane Katrina + 34 days after January 3, 2006 = 365 days); and
- The date within which individuals may file an appeal (affects health plans, disability plans, other welfare plans, and retirement plans): For example, if a participant received a denial notice on August 10, 2005 from her health plan, the 180-day period for filing an appeal will be tolled from August 29, 2005 through January 3, 2006. The last day that this participant can submit an appeal is June 14, 2006 (18-day period prior to Hurricane Katrina + 162 days after January 3, 2006).
This guidance also extends the time frames for plan administrators that have been adversely affected by the hurricane to make required COBRA and HIPAA portability disclosures. Under the guidance, the period from August 29, 2005 through January 3, 2006 will be disregarded for purposes of determining the dates for providing automatic HIPAA certificates of creditable coverage and COBRA election notices.
The Department of Health and Human Services has also issued guidance (September 2, 2005 and September 9, 2005) regarding disclosures of protected health information governed by the HIPAA Privacy Rule. The guidance clarifies that providers and health plans may disclose protected health information for treatment purposes and for other disaster relief purposes such as locating and identifying individuals. The guidance also permits business associates to make such disclosures even if their business associate agreements do not provide for such disclosures. Such disclosures will not be subject to any enforcement action by the Department as long as the business associate agreement is amended as soon as practicable.
Life Insurance Plans
Aside from the issues relating to administering health plan benefits, administrators of life insurance benefits may also face difficulties paying claims when beneficiary designation forms have been lost or death certificates cannot be found or produced because the participant’s body cannot be located or identified. In these instances, plan administrators should adopt reasonable procedures to determine a participant’s beneficiary and the credibility of any individual claiming to be a beneficiary. After the terrorist attacks of September 11, 2001, the Department of Labor issued guidance for plan administrators that face similar scenarios regarding lost or destroyed beneficiary forms. This guidance, which is accessible on the DOL’s website, may be helpful to plan administrators.
IRS Relief for Retirement Plans
Recognizing that Hurricane Katrina has strained the financial situations of many employees who have had to flee or abandon their homes and jobs, the IRS issued Announcement 2005–70 to permit such individuals to obtain loans and hardship distributions from their qualified retirement plans and IRAs during the period between August 29, 2005 and March 31, 2006. The guidance also waives the six-month suspension of contributions requirement that normally applies following a hardship withdrawal. It also relaxes the requirements for documenting the need for a hardship distribution and for obtaining loans (e.g., a plan may rely on alternate evidence of a spouse’s death if an employee requests a loan that requires spousal consent and the employee does not have a copy, or cannot timely obtain a copy, of his or her spouse’s death certificate). A plan administrator, however, must make a reasonable attempt to obtain such documentation as soon as practicable.
If a plan does not currently provide for loans or hardship distributions and wishes to provide the relief described in Announcement 2005–70, the plan may be so administered as long as it is amended to provide for one or both of these features, as applicable, no later than the last day of the 2006 plan year.
We note that the rules regarding distributions from qualified plans do not provide for distributions on account of natural disaster and that the safe-harbor hardship distribution rules for expenses for repairs to principal residences that have been damaged and expenses for burial under the final 401(k) regulations do not become effective until January 1, 2006. Although a plan may be amended to provide for hardship distributions for home repairs and burial expenses now, such a plan would also be required to concurrently adopt and administer all of other the changes provided in the final 401(k) regulations.
Other IRS, DOL and PBGC Relief
On September 2, 2005, the IRS, DOL and the PBGC jointly issued relief for employee benefit plans in federally declared disaster areas. The deadline for minimum funding contributions that are due between August 29, 2005 and October 30, 2005, has been extended to January 3, 2006 (see the modification to this guidance issued on September 14, 2005). The PBGC has also extended the due dates for premium payments, standard termination notices, participant notices, reportable events notices, and certain employer reporting for underfunded plans.
Furthermore, the deadlines for filing the Form 5500, as well as a whole host of other “time-sensitive” matters, have been extended to January 3, 2006. See Revenue Procedure 2005–27, Section 8, paragraph 29 and the DOL press release issued on September 20, 2005.
On September 15, 2005, Assistant Secretary Ann L. Combs of the DOL issued a statement regarding participant contributions and loan repayments, and blackout notices. According to the statement, the Department of Labor will not seek to enforce the provisions of ERISA Title I with respect to affected employers and service providers that fail to comply with the requirements regarding timely deposit with the plan trustee of employee contributions or loan payments, to the extent that the affected employer and service provider act reasonably, prudently and in the interest of employees to comply as soon as is practical under the circumstances. The statement also clarifies that the provisions in ERISA section 101(i) and Labor Regulations section 2520.101–3 allowing for an exception to the 30-day advance notice requirement for blackout periods because of an event beyond the reasonable control of the plan administrator apply to plans that have been affected by Hurricane Katrina. Although this exception requires a fiduciary to determine that such an event has occurred in writing, the statement provides that the Department of Labor will not allege a violation of the blackout notice rules solely on the basis that a fiduciary has not made the required written determination.
Despite the agencies’ rapid response, the following are some issues for which additional guidance would be appreciated:
- Relief from various disclosure obligations (enrollment forms, summary plan descriptions, distribution notices, etc.).
- Guidance regarding lost 401(k) or pension plan distributions, monthly annuity checks, loan paperwork or checks.
- Guidance regarding distributions to displaced participants who do not have addresses.
Congress and the President have also been actively considering hurricane-related legislation over the past few weeks. On September 23, 2005, the President signed the Katrina Emergency Tax Relief Act of 2005 (“KETRA”), Public Law No. 109–73, which provides emergency relief to the survivors of Hurricane Katrina. The following is an overview of the benefits-related provisions of this law:
- Penalty-Free Withdrawals from Retirement Plans:The law waives the ten percent penalty on early withdrawals of up to $100,000 from IRAs and qualified retirement plans, including 401(k) plans, profit sharing plans, 457 plans, and 403(b) plans, for “qualified disaster-relief distributions.” These distributions are available for a period of one year beginning on the date of the disaster declaration to individuals who have sustained a loss because of Hurricane Katrina, and whose principal residence is located in a federally-declared Hurricane Katrina disaster area.
- Income Tax Treatment on Qualified Disaster Relief Distributions:Eligible individuals who receive such distributions may spread out their income tax liability on such distributions ratably over a three-year period.
- Rollover Treatment for Contributions that Replace Qualified Disaster Relief Distributions:Individuals who receive a qualified disaster relief distribution may make one or more contributions in an aggregate amount equal to such distribution at any time during the three-year period following the distribution to an IRA or a qualified retirement plan and receive rollover treatment for the contribution.
- Rollover Treatment for Contributions that Replace Withdrawals for Home Purchases Cancelled Because of Hurricane Katrina:First-time home buyers who received distributions from an IRA or a qualified retirement plan between February 28, 2005 and August 29, 2005 to build or purchase a principal residence in an area that was later declared to be a Hurricane Katrina disaster area, but which were not used for these purposes, may re-contribute the distribution to an IRA or a qualified retirement plan within six months of the disaster declaration and receive rollover treatment for the contribution.
- Loans to Hurricane Katrina Victims from Qualified Plans:The law amends the rules regarding loans from qualified retirement plans for participants who have sustained a loss because of Hurricane Katrina and who have a principal residence in a Hurricane Katrina disaster area. Such an eligible individual may obtain a loan (when added to the outstanding balance of all other loans to the individual from all plans maintained by the employer) of up to the lesser of $100,000 (instead of $50,000) or 100% (instead of 50%) of his or her account balance. In addition, the law provides for the suspension of loan repayments for up to one year for eligible individuals who have outstanding qualified employer plan loans on August 26, 2005.
- Hurricane Katrina Plan Amendments:To reflect changes permitted by Hurricane Katrina legislation, plans may be amended retroactive to the effective date provided in the applicable employee benefit provision if the amendment is made on or the before the last day of the 2007 plan year, or such later date as provided by the Secretary of the Treasury. Government plans have two additional years to adopt required plan amendments.
Relief for Other Disasters
This article has focused on the relief granted as a result of Hurricane Katrina through September 23, 2005. The agencies and Congress will handle relief for future disasters on a case-by-case basis, but we expect that the Katrina relief will serve as a model in similar situations.
We expect further action by the IRS and the Department of Labor on KETRA, other Hurricane Katrina-related legislation and benefit plan guidance over the next few weeks. If you would like our office to assist you in implementing any of the relief described in this article, please contact the attorney you normally work with or the author of this article.