In the wake of the horrific wildfires in Los Angeles (which are ongoing as of today), employees based in the Los Angeles area may have questions about available support from employer-sponsored 401(k) plan accounts and other impacts on benefits. Below are some considerations for employers about making 401(k) plan funds available to employees and related issues during this extremely challenging time.

Can employees withdraw money from 401(k) plan accounts for wildfire-related expenses? This depends on the terms of the underlying plan, but most 401(k) plans provide some type of withdrawal right on account of hardship. By way of quick background, participants usually cannot take distributions from a 401(k) plan account until a distribution event, such as severance of employment, attainment of age 59½, or disability. However, many 401(k) plans provide exceptions to this rule whereby a participant can take an in-service withdrawal before a distribution event under the following circumstances:

Can an employee pay back amounts withdrawn for wildfire expenses to her 401(k) plan account? Possibly—that will depend on the nature of the withdrawal. Hardship withdrawals cannot be repaid, subject to a limited exception for withdrawals taken to construct a new primary residence that could not be used because of a qualified disaster. However, if a participant took a qualified disaster recovery distribution, emergency personal expense distribution, or plan loan, those amounts are generally eligible for repayment as summarized below:

Would an employer or plan sponsor need to amend its 401(k) plan to permit the relief described above? Potentially. Many 401(k) plans already permit hardship withdrawals, qualified disaster recovery distributions and plan loans. For those plans, a plan amendment is not necessary. If a 401(k) plan does not currently permit in-service withdrawals under the circumstances noted above and an employer desires to add them in response to the L.A. wildfires, the sponsor should coordinate with its recordkeeper to confirm those options can be implemented for the plan, with the understanding that any required plan amendment would be adopted by the applicable deadline.

Plans adopting the SECURE 2.0 disaster relief noted above must be amended for such purposes by December 31, 2026 (December 31, 2028 for collectively bargained plans). However, if a plan makes a discretionary change unrelated to SECURE 2.0 (e.g., implementing in-service hardship withdrawals for the first time), that amendment would be due by the end of the plan year.

We don’t have regular access to our workplace because of the wildfires. Is there any relief for an employer or plan sponsor that misses required benefit deadlines—for example, sending out COBRA election notices or other required notices? At this admittedly early moment in time, the government agencies have not announced any specific tolling relief that would apply to benefit administration. In the past, as covered in our blog post here, the agencies have offered limited relief for plan sponsors and fiduciaries who fail to timely provide a notice or other document that must be furnished to plan participants during a set relief period, provided that the fiduciary acts in good faith and does so as soon as administratively practicable under the circumstances. That agency guidance also typically extends benefit plan deadlines for individuals affected by natural disasters. While our expectation is that the agencies would issue something similar in response to the L.A. wildfires, that is not guaranteed and it is unclear at this point whether such relief will be issued.

Final thoughts on employee relief? Given the wide range of in-service distributions theoretically available to participants, most 401(k) plans are positioned to make relief available to eligible participants. For 401(k) plans that currently permit hardship distributions, other in-service distributions or plan loans, the next step may be publicizing the relief already available to impacted participants. Plan sponsors who have not adopted these features—or who are looking to expand or modify distributions options in response to the L.A. wildfires—should coordinate with their recordkeepers regarding the implementation steps and timeline.

Leave a Reply

Your email address will not be published. Required fields are marked *