In the devastating wake of Hurricane Katrina, Congress and federal governmental agencies have moved swiftly to provide relief to the individuals and businesses that have been affected by this natural disaster. This relief has been broad-based and includes extending filing and tax payment deadlines, increasing the standard mileage rate, and tax incentives. Federal agencies have also started to grant relief to individuals and businesses affected by Hurricane Rita as well. This Legal Alert summarizes the current state of the relief as it affects employee benefit plans.

Federal Government Agency Relief Affecting Retirement Plans

Loans and Hardship Distributions – On September 15, 2005 the IRS issued Announcement 2005-70 that relaxed the rules regarding loans and hardship distributions from retirement plans. Under this guidance, a qualified employer plan will not be treated as failing to satisfy any requirement under the Code or the regulations merely because the plan makes a loan or a hardship distribution for a need arising from Hurricane Katrina. This relief applies to employees (or their spouses or dependents) whose principal residence or place of employment on August 29, 2005 was located in certain designated areas. The relief applies to any qualified plan, 403(a) or 403(b) plan. If a qualified plan does not currently provide for hardship distributions or loans (or its terms would not allow hardship distributions in this situation), the plan may nevertheless make a loan or distribution, if the plan is amended no later than the end of the first plan year beginning after December 31, 2005. To qualify, a hardship distribution must be made on account of a hardship resulting from Hurricane Katrina and be made on or after August 29, 2005 and no later than March 31, 2006. Plan administrators may rely upon representations as to the need for and amount of a hardship distribution, unless they have actual knowledge to the contrary. In addition, a retirement plan will not be treated as failing to follow procedural requirements for plan distributions or loans merely because the requirements are disregarded for the period beginning on August 29, 2005 and continuing through March 31, 2006 for affected individuals. However, retirement plans must make a good faith effort to comply with the requirements.

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Participant Contributions and Loan Repayments –

In a statement issued September 15, 2005, the DOL provided that it will not seek to enforce the timing regulations requiring participant contributions and loan repayments to be forwarded to a retirement plan, if there is a temporary delay in forwarding the contributions or payments. This relief applies to employers, plan sponsors and service providers located in the affected areas. However, employers and service providers must act prudently and in the best interests of employees in order to qualify under the relief.

Blackout Notices – DOL regulations provide an exception to the blackout notice requirements when the inability to provide advance notice is due to events beyond the reasonable control of the plan and a fiduciary makes this determination in writing. In a statement issued September 15, 2005, the DOL provided that natural disasters, such as Hurricane Katrina, are by definition beyond the control of the plan administrator. Therefore, the issue was whether a formal written determination was required. However, with respect to affected plans, the DOL went on to say that it will not allege a violation of the blackout notice requirements solely on the basis that the fiduciary did not make the required written determination.

Plan Contributions – IRS Notice 2005-60 extends certain dates for making minimum funding contributions to qualified plans that were affected by Hurricane Katrina. If the date for making contributions falls within the period beginning on August 29, 2005 and ending on October 30, 2005, then the date by which the contribution must be made is delayed to October 31, 2005.

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Federal Government Agency Relief Affecting Health and Welfare Plans

On September 21, 2005, the DOL and the IRS jointly published Hurricane Katrina relief affecting health and welfare plans for purposes of ERISA and the Code. In the case of individuals affected by Hurricane Katrina, this relief requires all health and welfare plans to disregard the period from August 29, 2005 through January 3, 2006 when determining any of the following time periods and dates –

· A 63-day break in coverage under HIPAA;

· The 30-day period to secure creditable coverage without a preexisting condition exclusion for certain children under HIPAA;

· The 60-day period to elect COBRA continuation coverage;

· The date for making COBRA premium payments; and

· The date for individuals to notify the plan of a qualifying event or determination of disability under COBRA.

The relief also provides that group health plans that were affected by Hurricane Katrina shall disregard the period from August 29, 2005 through January 3, 2006 when determining the following dates –

· The date for providing an automatic certificate of creditable coverage under HIPAA; and

· The date for providing a COBRA election notice.

The relief does not require any notice to plan participants and beneficiaries regarding the suspension of the relevant time periods. However, given the continuing development of a fiduciary's duty to fully inform plan participants regarding plan changes, a prudent fiduciary should take steps to inform the affected populations.

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Federal Government Agency Relief Affecting All Employee Benefit Plans

Form 5500 Filings – On September 20, 2005, the DOL announced that Form 5500 series filings required to be filed between August 29, 2005 and January 3, 2006 are granted an extension until January 3, 2006. On September 28, 2005, the DOL extended this deadline to February 28, 2006. This extension applies to plan administrators, employers and other entities located in the areas affected by Hurricane Katrina. The extension also applies to firms located outside the affected areas who are unable to obtain the necessary information from service providers, banks or insurance companies whose operations were directly affected by Hurricane Katrina.

Claims Procedures – On September 21, 2005 the DOL announced that all ERISA employee benefit plans shall disregard the period from August 29, 2005 through January 3, 2006 for individuals affected by Hurricane Katrina when determining the date within which an individual may file a benefit claim or an appeal of an adverse benefit determination under the plan’s claims procedures.

Legislation

On September 23, President Bush signed into law the Katrina Emergency Tax Relief Act of 2005 (“KETRA”). The following is a summary of KETRA as it affects retirement plans –

Special Distribution Rules – KETRA provides that the 10% penalty tax does not apply to a distribution from an eligible retirement plan made on or after August 25, 2005 and before January 1, 2007 to a plan participant whose principal residence was located within the Hurricane Katrina disaster area on August 28, 2005. Plan participants must have sustained an economic loss by reason of Hurricane Katrina. These distributions are limited to $100,000 in the aggregate. Participants can elect to include the distributions in their ordinary income over a three-year period. Alternatively, participants who receive these distributions may exclude them from income by repaying all or part of the distributions within three years by making corresponding contributions to an eligible retirement plan. These repayments / contributions will be treated as rollover contributions.

Hardship Distributions for Principal Residences – This provision relates to a hardship distribution that was received after February 28, 2005 and before August 29, 2005 to purchase or build a principal residence in the Hurricane Katrina disaster area. In this instance, if the distribution was not used to purchase or build a principal residence as a result of Hurricane Katrina, the participant may contribute all or part of the distribution to an eligible retirement plan and this amount will be treated as a rollover contribution. The contributions must be made during the period beginning on August 25, 2005 and ending on February 28, 2006.

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Plan Loan Limits Increased –

A participant whose principal residence on August 28, 2005 was within the Hurricane Katrina disaster area and who suffered an economic loss by reason of Hurricane Katrina is eligible for a higher loan limit. This limit is the lesser of $100,000 or 100% of the vested account balance. Loans subject to this higher limit must be made after KETRA’s enactment and before January 1, 2007. DOL regulations provide that no more than 50% of a participant’s account balance can be used to meet ERISA’s requirement that a loan be adequately secured. This means that plan administrators will need to obtain adequate security outside the plan for loans that exceed this limit. However, we understand that various groups have asked the DOL to waive the security requirement for these loans.

Delayed Loan Repayment – A participant whose principal residence on August 28, 2005 was within the Hurricane Katrina disaster area and who suffered an economic loss by reason of Hurricane Katrina is also eligible for a delay in repaying an outstanding plan loan. This provision applies to any loan outstanding on or after August 25, 2005, and delays for one year the due dates of loan repayments to the extent the due date would otherwise fall within the period beginning on August 25, 2005 and ending on December 31, 2006. Subsequent repayments shall be appropriately adjusted to reflect the delay, and in determining the maximum term of the loan the delay shall be disregarded.

Plan Amendments – Plan amendments for KETRA must be adopted on or before the last day of the first plan year beginning on or after January 1, 2007, unless this date is extended by the IRS.

Currently, there are also a number of other bills that have been introduced in Congress that would provide additional relief than what is provided by KETRA. Therefore, it is likely that additional legislative changes affecting employee benefit plans will be coming in the near future.

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Hurricane Rita Relief

On September 28, 2005 the DOL issued the first announcement regarding relief for Hurricane Rita. Under this relief, the DOL provided that Form 5500 series filings required to be filed between September 23, 2005 and February 28, 2006 are granted an extension until February 28, 2006. This extension applies to plan administrators, employers and other entities located in the areas affected by Hurricane Rita. The extension also applies to firms located outside the affected areas who are unable to obtain the necessary information from service providers, banks or insurance companies whose operations were directly affected by Hurricane Rita. In the coming weeks, it is likely that other agencies may follow DOL’s lead and grant additional Hurricane Rita relief similar to that granted for Hurricane Katrina.

The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com