Southern California Wildfires: Employers Should Be Aware of Potential Financial Resources for Employees
Southern California Wildfires: Employers Should Be Aware of Potential Financial Resources for Employees
Key Points:
- Employers may voluntarily provide certain cash payments and adopt leave-sharing programs allowing other employees to provide needed assistance to affected employees.
- Employer-sponsored retirement plans may already provide various ways to financially assist employees affected by the fires.
- If certain features that would help employees access cash have not yet been adopted by an employer, employers may adopt programs and amend retirement plans to provide such features.
On January 8, 2025, President Biden declared a major disaster in Los Angeles County, California for rampant wildfires that have continued to destroy businesses and homes across the area. As a result of the presidential declaration, various resources have become available to assist in recovery efforts. Additionally, there may already exist a number of provisions in employer-sponsored retirement plans that could provide much needed financial support to those affected by the disaster. This alert provides an overview of various employee benefit resources that may be available to support employees during this challenging time.
Potential Resources for Support of Employees
- Qualified Disaster Relief: Because the wildfires in Los Angeles County are a federally declared disaster, employers can voluntarily make qualified disaster relief payments to employees under Internal Revenue Code (Code) section 139. Such payments are to reimburse or pay “reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster” and are not treated as taxable wages for federal tax purposes. For California payroll tax purposes, such payments are not subject to income tax withholding, but are subject to unemployment insurance, employment training tax and state disability insurance withholdings, unless the payment is related to the death of an employee.
Leave-Sharing: There are two types of leave-sharing programs that an employer could adopt. The type that would be most useful for providing assistance to wildfire victims is the disaster leave-sharing program. The IRS provided guidance under Notice 2006-59 as to the way in which a disaster leave-sharing program must be operated and permits employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a federally declared disaster. If the program is operated under the IRS rules, the recipient employee and not the donor employee will be taxed on the amount of the leave donated.
The second type of leave-sharing program may be less useful for employees affected by the wildfires, since it is limited to assistance for medical emergencies. The IRS provided guidance under Revenue Ruling 90-29 for establishing an employer-sponsored catastrophic leave-sharing program to address medical emergencies. This program also would permit the recipient and not the donor to be taxed when donated leave is used only for medical emergencies.
Potential Assistance From Employer-Sponsored Retirement Plans
- Qualified Disaster Recovery Distribution: Similar to the Qualified Disaster Relief, this plan provision may be available until 179 days after the disaster declaration was issued (i.e., July 6, 2025). If the plan provides for qualified disaster recovery distributions, an eligible plan participant (of a 401(a) tax-qualified plan, 401(k), 403(b) plan or 457(b) plan) may receive a distribution of up to $22,000 and would be exempt from the 10% early distribution tax that may otherwise apply.
- Hardship Distributions and Unforeseen Emergency Withdrawals: Hardship distributions from a 401(k) plan, if permitted under the plan, can be made only if necessary to satisfy an immediate and heavy financial need. Unforeseen emergency distributions from a 457(b) plan, if permitted under the plan, can be made in the case of severe financial hardship of the participant or beneficiary resulting from an illness, or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or beneficiary. Both types of distributions are taxed in the year taken, cannot be repaid to the plan, and are limited to the amount necessary to meet the financial need.
- Pension-Linked Emergency Savings Account (PLESA): A PLESA permits a non-highly compensated employee who participates in a 401(k), 403(b) or governmental 457(b) plan, to contribute to a separate account under the plan up to $2,500 (indexed for inflation) for emergency needs. All withdrawals are treated as qualified Roth distributions, which means earnings and withdrawals are not subject to taxation. There is no particular requirement that a participant meet a specific criterion, such as a hardship, to receive a distribution. However, there are certain rules regarding withdrawals that may make this feature unattractive for plan sponsors.
- Participant Loan from Retirement Plans: Generally, if permitted by the plan, a participant in a 401(a) or 401(k) plan, 403(b) plan or governmental 457(b) plan, may take out a participant loan for the lesser of: $50,000 or 50% of the participant’s vested benefit. Section 331 of the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0 Act) allows plan sponsors to expand loan limits for any “qualified individual” whose principal place of abode during any qualified disaster is located in the disaster area and who suffers an economic loss due to the disaster. In that case, the qualified individual may take out a participant loan for the lesser of $100,000 or 100% of the participant’s vested benefit.
Retirement Plans May Require Amendment: To the extent a retirement plan does not currently provide for any of the plan features discussed above, the plan sponsor would need to amend the plan (or plans) to permit any such features.
If you have any questions regarding any of the benefits mentioned in this alert, please contact the Hanson Bridgett Employee Benefits Group for assistance.
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