How Announced IRS Tax Relief for Hurricane Victims Affects Welfare Benefit Plans

For individuals and families ravaged by the effects of Hurricanes Harvey and Irma, tax relief is probably the item of least concern during this time of rebuilding. As hurricane victims slowly regain a sense of normalcy, their thoughts will return to more routine matters. During this time, hurricane victims should be aware that they may qualify for certain tax relief concerning their employee welfare benefits.

Section 7508A of the Internal Revenue Code grants authority to the Internal Revenue Service (IRS) to postpone certain tax deadlines by reason of a Presidentially declared disaster, and the IRS announced in TX-2017-09 that victims of Hurricane Harvey in parts of Texas may qualify for particular tax relief. Additionally, the IRS announced that victims of Hurricane Irma in Florida, Georgia, Puerto Rico, and the U.S. Virgin Islands may qualify for tax relief in FL-2017-04, GA-2017-02, PR-2017-01, and VI-2017-01 respectively. The IRS created a website as a resource of tax-related news and assistance available to victims of Hurricanes Harvey and Irma. The website is https://www.irs.gov/newsroom/tax-relief-in-disaster-situations.

WHO MAY QUALIFY FOR THE TAX RELIEF?

In Florida, individuals who reside or have a business in any Florida county may qualify for tax relief.

In Georgia, individuals who reside or have a business in any Georgia county may qualify for tax relief.

In Puerto Rico, individuals who reside or have a business in the following municipalities may qualify for tax relief: Adjuntas, Aguas Buenas, Barranquitas, Bayamón, Camuy, Canóvanas, Carolina, Cataño, Ciales, Comerío, Culebra, Guaynabo, Hatillo, Jayuya, Juncos, Las Piedras, Loíza, Luquillo, Orocovis, Patillas, Quebradillas, Salinas, San Juan, Utuado, Vega Baja, Vieques, and Yauco.

In Texas, individuals who reside or have a business in the following Texas counties may qualify for tax relief: Aransas, Austin, Batrop, Bee, Brazoria, Burleson, Calhoun, Chambers, Colorado, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Harris, Hardin, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller, Washington, and Wharton Counties.

In the U.S. Virgin Islands, individuals who reside or have a business in the islands of St. Croix, St. John, and St. Thomas may qualify for tax relief.

The IRS is continually updating the list of counties that qualify for tax relief. For the most current list of counties, please check the announcement linked to the area of your concern or go to https://www.irs.gov/newsroom/tax-relief-in-disaster-situations.

What Tax Relief is Available?

The IRS has postponed certain tax deadlines falling on or after August 23, 2017, and before January 31, 2018. The exact deadline time frame varies with each announcement, so victims in different regions will have different starting dates. Please check your respective announcement for your applicable deadlines. Regardless, the IRS has given affected taxpayers until January 31, 2018, to perform time-sensitive actions described in Treas. Reg. § 301.7508A(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007). The available tax relief that is most applicable to employee welfare benefit plans is as follows:

• The filing of Form 5500 series returns (that were required to be filed between the applicable relief starting date and January 31, 2018). An ERISA Form 5500 is required for any component benefit plan that is an ERISA welfare plan unless an exemption from ERISA applies. Generally, governmental and church plans as well as certain small, unfunded or insured welfare plans are exempt from ERISA. If you are unable to obtain the information needed to complete your Form 5500 filing or question whether your plan is exempt from ERISA, please contact your NBS account representative.

• Initial and Open Enrollment Elections. Typically, cafeteria plan participants must prospectively make their benefit elections in advance of the next plan year to avoid constructive receipt of the value of the benefits on a post-tax basis. The IRS has given affected taxpayers until January 30, 2018, to make open enrollment elections. Be advised that this relief is for tax purposes only and does not postpone open election for insurance coverage. Please contact your insurance carriers to learn what relief they may be offering hurricane victims in terms of initial and open enrollment elections.

• The “Use-or-Lose” Rule. Generally, cafeteria plan contributions that are not used during the coverage period for which they are selected cannot be carried over for use in subsequent plan years and must be forfeited unless an exception applies (such as a grace period or health FSA carryover). The IRS has postponed the application of the “Use-or-Lose” rule for affected taxpayers until January 31, 2018. If you have questions on how your employee benefit plan may be affected by the postponement of the “Use-or-Lose” Rule, please contact your NBS account representative.
• Cash-Out of Vacation Days. Generally, under cafeteria plans that allow the purchase of additional vacation days, purchased vacation days must be used, cashed out, or forfeited by plan year-end and cannot be carried over to subsequent plan years. The IRS has postponed the deadline by which affected taxpayers must cash out their purchased vacation days until January 31, 2018. Be advised that the IRS has not relaxed the regulations that prevent purchased vacation days from carrying over to subsequent plan years.

Please be aware that the above-listed items are a small portion of the deadlines listed in Rev. Proc. 2007-56. Please speak with your trusted legal or tax advisors on what additional relief may be available to you under IR-2017-135.

How is claim substantiation affected?

Currently, the IRS has not relaxed third-party claim substantiation requirements. Consequently, hurricane victims must still provide independent, third-party substantiation evidence to their cafeteria plan administrator in order to be reimbursed for expenses for qualified benefits. However, some organizations, such as the Employers Council on Flexible Compensation (ECFC), have urged the U.S. Department of the Treasury and Internal Revenue Service (IRS) to provide limited relief from the substantiation requirements for cafeteria plans. To date, neither the U.S. Department of the Treasury nor IRS has responded to such requests. If the IRS declares such substantiation relief, NBS will inform its clients of any applicable relief.

Are Midyear election changes available?

Please understand that a natural disaster by itself is not a permitted election change event. Nevertheless, certain events related to Hurricane Harvey and Hurricane Irma may allow participants to make an election change. For example, a participant may be on an unpaid leave of absence, a participant’s spouse may have lost employment, or a participant’s daycare provider may have changed. If you have questions on midyear election changes, please contact your NBS account representative.

In conclusion, NBS sympathizes with all employers and employees who suffered under Hurricane Harvey and Hurricane Irma. During this time of refocusing and rebuilding, NBS will strive to eliminate any confusion surrounding your employee welfare benefit plan and to provide caring service to your plan participants. If you have any questions or concerns about this notice, please contact your NBS account representative.