Client Service August 22, 2023

IRS Provides Tax Relief for Hawaii Wildfire Victims

Victims of the wildfires on the islands of Maui and Hawaii are eligible for Internal Revenue Service tax relief, including waiving the penalty fee for hardship withdrawals.  

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As many victims of the recent Hawaii wildfires have lost homes, loved ones and are now faced with significant financial hardship, the Internal Revenue Service announced Friday expansive tax relief for victims in Maui and Hawaii counties. 

Affected taxpaying individuals and businesses have until February 15, 2024 (with original deadlines from August 8, 2023, through February 15, 2024), to file various federal individual and business tax returns and make tax payments.  

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Additional relief may also be available to affected taxpayers who participate in a retirement plan or an individual retirement arrangement. Specifically, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the 10% early distribution tax and allows the taxpayer to spread the income over three years, according to the IRS.  

If the taxpayer’s plan allows for hardship withdrawals, the 10% early withdrawal penalty would be waived, but the participant would still have to claim the withdrawal as income on their taxes for the year. Each plan or IRA has specific rules and guidance that participants must follow. 

Additionally, penalties for the failure to make payroll and excise tax deposits due between August 8 and September 7 will be abated, as long as the deposits are made by September 7, the IRS stated. 

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area, applying to the entire islands of Maui and Hawaii. These taxpayers do not need to contact the agency to get this relief. 

But it is possible an affected taxpayer may not have an IRS address of record located in the disaster area, such as if they moved to the disaster area after filing their return. In these circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. In that case, the taxpayer should call the number on the notice to have the penalty abated. 

Individuals and business in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can also choose to claim them on either the return for the year the loss occurred (in this instance, the 2023 return normally filed next year), or the return for the prior year (2022). Taxpayers have up to six months after the due date of their federal income tax return for the disaster year to make the election. 

Qualified disaster relief payments are generally excluded from gross income, according to the IRS. 

“In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents,” the IRS stated. 

The tax relief is part of a coordinated federal response to the damage caused by the wildfires and is based on local damage assessments by the Federal Emergency Management Agency.  

At least 114 people have died in the western Maui wildfires, with about 850 still unaccounted for. According to Hawaii Governor Josh Green, about 2,200 structures have been destroyed or damaged as a result of the fires, and 86% of these structures are residential. The estimated cost of the damage is around $6 billion.  

The IRS Disaster Assistance and Emergency Relief for Individuals and Businesses page has details about other returns, payments and tax-related actions qualifying for relief during the postponement period. 

In Practice August 22, 2023

With Roth Use Set to Grow, Vanguard Stresses Participant Education

The firm’s retirement head says its plan sponsor clients are ready for implementation, but participants can use more information.

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The “Rothification” of retirement savings will gain steam in 2024, as the SECURE 2.0 Act of 2022 mandated Roth catch-up contributions for those over the age of 50 who make more than $145,000 a year.

But implementation, while mandatory, will still need plan adviser consultation and education for plan sponsors to understand—and communicate—the potential benefit of post-tax Roth saving to participants, according to David Stinnett, a principal in strategic retirement consulting at the Vanguard Group.

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“There are advantages to using a Roth, but we need to continue to educate participants on those advantages, depending on their personal situation,” Stinnett says.

SECURE 2.0 has multiple provisions that boost Roth 401(k) and individual retirement account savings, which are funded with post-tax income. Those include the 2024 mandatory Roth catch-up for high-income earners; a Roth option for employer matching contributions if the contributions are fully vested; and, also beginning in 2024, participants with Roth accounts are no longer subject to pre-death required minimum distributions.

As of the end of 2022, 80% of plan sponsors were already offering Roth contributions, according to Vanguard commentary published in July. Meanwhile, 17% of participants contribute to Roth accounts, a significant jump from 2018, when just 11% were contributing to the savings vehicle, according to the researchers.

David Stinnett.

Retirement industry groups have been lobbying for more time for Roth regulations to take hold, noting the recordkeeping and administrative issues that arise from both making Roth contributions available and sorting out payroll processing with the $145,000 threshold in mind.

Stinnett says the plan sponsors his team works with are prepared to implement Roth options, but the bigger push is around education and communication.

“Our role now is to discuss the benefits for participants,” he says. “There are a number of tax benefits that can come from Roth savings, but it will depend on the individual.”

Vanguard’s report noted that having a sizable Roth balance can provide tax diversification and lower overall tax liability by reducing the need to draw down taxable accounts such as 401(k) and traditional IRA savings accounts.

The authors also noted, however, that Roth options are not the best solutions for every saver. Some plan participants may benefit from pre-tax accounts, including those whose income and tax rate are both likely to be reduced in retirement or who have only temporary high income.

Whatever a participant’s situation for participants, plan sponsors should be providing targeted communications about Roth options to their employees, Vanguard noted.

“Once the Roth option has been added to a plan, sponsors should consider how to educate participants about the benefits of Roth contributions,” the report’s authors wrote. “Given the tax intricacies of Roth accounts, some participants find them difficult to fully comprehend. Because of this, a targeted, long-term approach to communication often works best.”

Beyond Roth options, Stinnett sees further benefits for participants coming out of SECURE 2.0 to improve overall financial well-being.

Stinnett notes that emergency savings programs are already available for participants and can be a good vehicle to prevent savers from making more costly loan distributions or outright withdrawals. Further integration will depend on advisers and plan sponsors being more deliberate in adding emergency programs to plan design, he says.

Meanwhile, student loan matching has potential to further help participants and is a subject of discussion with plan sponsor clients, Stinnett says. But getting recordkeepers and plan sponsors to put that process in place will take time.

“SECURE 2.0 came with a lot of excitement and brought good ideas to the table,” he said. “Implementation, as with most legislation, will take time.”

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