The California wildfires were officially declared a federal disaster by the Federal Emergency Management Agency (FEMA) on January 7, 2025. Plan sponsors and participants continue to navigate the financial and administrative impacts of these events. During this unpredictable time, plan sponsors may be able to provide various forms of relief to impacted participants. Plan sponsors and participants alike may also qualify for filing and payment extensions. Understanding these options not only helps address current needs but also positions plan sponsors to respond quickly and effectively to similar emergencies or federally declared disasters in the future.
Plan Participant Relief
Participants in employee benefit plans – usually employees but sometimes their beneficiaries – may be eligible for relief through retirement plan distributions, waivers of medical and/or prescription drug requirements, and extensions on tax filing and payment deadlines.
Hardship Distributions
If permitted by the plan, hardship distributions allow participants facing “immediate and heavy financial need” to withdraw necessary amounts.
First, check the plan documents. Hardship distributions are allowed only if explicitly permitted in the plan documents under specified conditions. The plan administrator must ensure the hardship process is nondiscriminatory and that the plan’s requirements are satisfied.
Next, ensure distribution requirements are met. If the plan allows hardship withdrawals, the plan administrator must ensure that the distribution is made: 1) “on account of an immediate and heavy financial need” and 2) the amount distributed is only as much as is “necessary to satisfy that need (plus any amounts necessary to pay any taxes or penalties reasonably anticipated to result from the distribution).”
- Immediate and Heavy Financial Need. An immediate and heavy financial need can be determined through one of two ways: through a facts and circumstances analysis or through the safe harbor method. Either the plan administrator, after review of all relevant facts and circumstances, will determine whether the participant has shown an immediate and heavy financial need; or under the safe harbor method, an employee is automatically deemed to have an immediate and heavy financial need under one of seven circumstances. Of relevance here, one such safe harbor applies if the distribution is requested on account of “expenses and losses (including loss of income) incurred . . . on account of a disaster” when the employee or the employee’s primary beneficiary’s principal place of residence or employment is located within a FEMA designated disaster area.
Whether the plan uses the safe harbor or facts and circumstances method will be addressed in the plan documents.
- Amount Necessary to Satisfy the Need. Participants may only withdraw the amount necessary to satisfy the immediate and heavy financial need, including any amount needed to pay any taxes or penalties related to the distribution. The employee must have exhausted all other plan distributions available and represented in writing that they have “insufficient cash or other liquid assets reasonably available to satisfy the need.” Such assets are not reasonably available if they are earmarked for other financial obligations. The distribution is generally limited to funds contributed by the employee (and any earnings on these accounts) that have not already been withdrawn for another purpose.
If the plan administrator has actual knowledge that contradicts the employee’s representations, the hardship distribution will not be permitted.
Review the plan documents again. Even if the plan allows hardship distributions, plan administrators should perform an additional final review before approving. The regulations permit the plan to provide for additional conditions on hardship distributions. It’s worthwhile to review the plan again for any additional conditions it imposes beyond statutory and regulatory requirements.
If the plan currently does not allow for hardship distributions, the plan may be amended to permit them moving forward.
Loans
If permitted, participants may opt to take a loan from their 401(k)-plan account. With a loan, a participant can generally borrow the lesser of $50,000 (minus existing loan balances), or the greater of:
(1) $10,000, or
(2) 50% of the vested account balance.
The loan must then be repaid, with interest, on a consistent schedule (at least quarterly) within five years maximum. If employment ends, the remainder of the loan balance may become immediately due.
If plan requirements have been met and the loan is timely repaid, the disbursement of the loan is not a taxable event.
Like hardship distributions, it is critical that the plan sponsor closely review the plan documents to confirm the specific plan’s procedure and requirements, as the plan may be more restrictive than the statutory and regulatory limits including in regard to the dollar limits, the loan terms, the number of outstanding loans permitted at a time, the funding sources (i.e., contribution types) available for loans, any collateral requirements for the loan, the repayment schedule, and the amount of interest on the loan. Once a loan from the plan has been requested, an agreement must be entered, and documentation should be maintained with the plan records.
Plan documents may be amended to allow for loans, but plan administrators should be prepared to meet administrative requirements before doing so. Loans must be available to participants in a nondiscriminatory manner, and repayments from participants must be timely contributed to the plan to avoid a prohibited transaction.
Qualified Disaster Distributions
SECURE 2.0 introduced disaster relief provisions that permit a plan to provide relief in response to a “qualified disaster.” Those affected may withdraw up to a total of $22,000 from their qualified retirement plan accounts, penalty-free. The distributions may be included in income in equal amounts over a three-year period. Further, if the recipients so choose, they may repay a qualified disaster distribution within the three-year period beginning on the day after the date of the distribution.
The qualified disaster distribution provisions also increase the participant loan maximum to the lesser of the full amount of the participant’s vested account balance or $100,000 (minus outstanding loan balances). Additionally, outstanding loan repayments that were due within six months of the disaster may be suspended for up to one year.
The request for either a qualified distribution or an enhanced loan must be made within 180 days of the disaster or declaration of the disaster – whichever comes later.
Like hardship distributions and loans, qualified disaster distribution provisions are optional. Because these provisions were added by SECURE 2.0, they are also relatively new. Plans without qualified disaster distribution provisions may be amended by December 31, 2026, to permit them. However, regardless of whether qualified disaster distributions are permitted by the plan, a plan participant may treat an otherwise qualifying distribution as such on their federal tax return.
Healthcare Waivers
Certain health and welfare benefits provided under group health plans—such as medical or prescription drug benefits—are accessible only after participants meet specific requirements, like obtaining prior authorization, adhering to quantity limits, using network providers, or filing claims within certain timeframes. Certain insurance contracts and service provider agreements allow these requirements to be waived. These waivers may apply broadly whenever it’s in participants’ best interests, or only specifically in response to disasters.
Plan sponsors should review their service provider agreements and consult with their insurers or third-party administrators to determine if such waivers can offer relief to affected participants.
Filing and Payment Relief
Participants may be entitled to tax filing extensions granted by the IRS. Participants affected by the LA wildfires automatically qualify for certain IRS tax filing and payment extensions until October 15, 2025, if they (or their spouse, if filing jointly) live, have a business or records, use a tax preparer, or provide relief services, within the disaster area—or were injured while visiting it.
The October 15 deadline applies broadly to individual and business tax returns, estimated payments, and other filings originally due between January 7, 2025, and October 15, 2025. The IRS will also waive fees for copies of previously filed tax returns. Those participants who are affected but live or have a business outside of the disaster area can call the IRS disaster hotline at 866-562-5227 to request this relief.
Plan Sponsor Relief
Like participants, plan sponsors are eligible for relief from some filing and payment deadlines if the plan is impacted by the LA wildfires.
The October 15th extension is applicable to the following actions relevant to plan sponsors and plan administrators:
- Premium filings
- ERISA Section 4010 reporting for certain underfunded plans
- Some Form 10 Reportable Events
- Form 5500 series returns that are required to be filed from January 7, 2025, to October 15, 2025
- Paying minimum required distributions under IRC Section 401(a)(9)
- Distributing elective deferrals that exceed the annual limit under IRC Section 402(g)
- Distributing or forfeiting contributions to pass the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests
- Making deductible plan contributions under IRC Section 404(a)
For the first three items above, plans must notify PBGC of eligibility for relief via email by the end of the relief period (but ideally as soon as possible) by following the disaster relief instructions for filing.
Moving Forward: Action Steps for Plan Sponsors
Plan sponsors should review their plan documents now, confirming available relief measures and making necessary amendments. Clear, timely communication to employees is critical. Providing an FAQ or simple internal notice outlining available options, deadlines, and application processes can greatly support participants.
Continuing to monitor guidance from the IRS, DOL, and PBGC ensures compliance with evolving requirements and helps your organization respond effectively—both now and during future disasters.