GRIST Report: Immediate employer issues in responding to Hurricane Katrina

By Judy Bauserman, Valerie Grace, Neil Grossman, Gina Marsala, and Cynthia Megowan Olds of the Washington Resource Group
September 8, 2005, revised September 29, 2005

In This Article
Summary | Employers respond swiftly to crisis | FAQs about immediate benefit delivery | FAQs about benefit plan compliance deadlines | FAQs about restoring business operations | Additional relief coming

Summary

This article has been revised to reflect actions taken by Congress, federal agencies, and others during the past three weeks. Employers with business enterprises in the path of Hurricane Katrina confront a variety of human resource issues as they help employees cope with their losses and try to restore business operations. This article outlines some of the most urgent HR issues, with a focus on legal and tax considerations affecting the delivery of employee benefits in a time of crisis. We include frequently asked questions (FAQs) relating to expense reimbursements, health benefits, death benefits, retirement benefits, compliance deadlines, and various laws regulating employment practices.

Employers respond swiftly to crisis

In the wake of the severe disruptions resulting from Hurricane Katrina, many employers have moved quickly to help employees and their families cope by setting up employee hotlines, websites, and emergency assistance centers. Some are continuing to pay employees whose worksites are unusable, while others are offering cash advances against future compensation, loans or grants, and temporary housing arrangements. Some employers, including the federal government, allow their employees to donate unused leave for use by affected individuals or for conversion into cash charitable contributions. Many are trying to ensure that employee benefit programs – particularly health plans – are operating smoothly at a time when they are most needed.

For more information on Katrina-related issues, refer to Mercer’s Hurricane Katrina Employer Resource Guide.

FAQs about immediate benefit delivery

As employers strive to meet their employees’ needs and expectations, they will want to consider a number of tax and legal issues, many of which are raised in the FAQs below. We note at the outset that some of the rules depend on whether an affected party is located in one of the hardest-hit areas, known as a core disaster area. The core disaster area is defined narrowly to include only the specific counties or parishes in Louisiana, Mississippi, and Alabama that FEMA designates as eligible for “individual assistance.” Some parts of the Katrina-stricken area are eligible only for FEMA “public assistance,” so the rules that specifically target core disaster areas would not apply in those cases.

Other rules – those addressing “time-sensitive” actions under the tax code – provide relief to affected parties in a broader disaster area. The broader disaster area encompasses the core disaster area plus counties or parishes in Louisiana, Mississippi, Alabama, or Florida that are eligible for Katrina-related FEMA public assistance. Several of the benefit plan- and employment-related actions discussed below are considered time-sensitive, and if affected parties would have otherwise had to act between August 29, 2005 (August 25 for Floridians) and February 28, 2006, the parties now have until February 28, 2006, to act (see Notice 2005-73; IR-2005-112). Congress set the February 28 deadline when it enacted the Katrina Emergency Tax Relief Act of 2005 (KETRA). (See GRIST #20050226, 9/21/05, and GRIST #20050232, 9/23/05, for a summary of KETRA’s provisions.) The full list of actions eligible for this relief is included in Rev. Proc. 2005-27. Affected taxpayers should mark “Hurricane Katrina” in red ink on returns and filings for which deadlines have been extended.

While this article focuses on the impact of Hurricane Katrina, many of the issues are the same for parties affected by Hurricane Rita. For Rita victims, the IRS has announced (IR-2005-110) that deadlines for time-sensitive actions under the tax code are also extended to February 28, 2006. DOL has announced the same extension for Form 5500 filers affected by Hurricane Rita (DOL News Release 05-1848-DAL). At this time, relief for other requirements is specific only to Hurricane Katrina. The IRS and other agencies are considering whether additional relief is necessary for Katrina and Rita victims. Employers should monitor these sites for updates:

• IRS Help for Hurricane Victims Web page

• DOL Hurricane Recovery Assistance Web page

If an employer provides temporary lodging for employees displaced by Katrina, is this includable in their gross income? The affected employees probably will be able to treat the lodging as tax-free “qualified disaster relief payments” under Code section 139 (Rev. Rul. 2003-12). In general, employees may exclude from gross income any grants they receive from their employers to pay or reimburse reasonable temporary lodging expenses incurred as a result of a presidentially declared disaster, as long as the expenses are not reimbursed by insurance or other means. Similar rules apply to other personal, family, and living expenses incurred as a result of a disaster, including medical, transportation, and funeral expenses. The grants should be “reasonably expected to be commensurate with” the amount of unreimbursed expenses.

Are there wage and hour implications if an employer provides temporary lodging? Under the Fair Labor Standards Act, employers generally may take a credit toward their minimum wage and overtime obligations for the reasonable cost or fair value of board, lodging, and similar facilities they provide for non-exempt employees. However, there are several conditions – one of which is that the employer must “customarily” furnish the board, lodging, or facilities. It remains to be seen whether the Department of Labor will relax this condition for employers responding to Katrina. Employers also must include the cost or fair value of any board, lodging, and facilities in calculating non-exempt employees’ regular rates of pay for overtime purposes. In certain instances – for example, where the board, lodging, or facilities takes the form of a Code section 139 tax-free grant – it might be possible to argue that the amount should not be characterized as wages under the FLSA. Employers should check state wage and hour laws as well.

Will health plans make any accommodations to provider networks, payment processes, and other administrative requirements? Health insurers and HMOs, as well as other types of benefit providers, have announced plans to assist residents of the disaster areas by extending grace periods for premium payments, relaxing pre-certification and emergency treatment notice requirements, treating out-of-network services as in-network, and lifting frequency limitations. Some health plans are helping affected individuals replace or refill prescriptions for medications or replace eyeglasses or contact lenses lost in the storm.

To ease concerns about HIPAA privacy requirements, the Department of Health & Human Services issued a bulletin summarizing the ways in which protected health information may be used and disclosed during emergency situations. Generally, health care providers can share patient information to (i) provide treatment, (ii) notify family members or other responsible parties of the patient’s location or condition, (iii) assist the Red Cross and other disaster relief organizations, and (iv) lessen serious and imminent threats to public health and safety. Health care facilities may also confirm to telephone callers that a patient is at the facility.

If an employee’s death cannot be confirmed, when will death benefits be paid? Generally, when there is no proof of an employee’s death, insurers, retirement plan administrators, and others who provide death benefits require a certain amount of time to elapse before they will presume an individual is dead and pay benefits. However, after the 9/11 attacks, some insurers and administrators waived the waiting period and paid life insurance proceeds after the recovery efforts had ended. Similar policies may be instituted for Katrina victims.

If the beneficiary designation forms were lost, how will death benefits be paid? Insurance policies and benefit plan documents typically have provisions that address death benefits when no beneficiary designation exists. Often they specify that the benefit will be paid to the decedent’s estate. Alternatively, they may specify that benefits will be paid to survivors in a particular order such as (i) the spouse; (ii) if there is none, then children; (iii) if no surviving children, then grandchildren, parents, siblings;  and finally (iv) the estate. Where the insurer’s and employer’s copies of a beneficiary designation have been lost but a family member can produce a copy, the insurer or benefit plan administrator may consider the validity of the designation.

Can employees change their health and group benefit plan elections because of financial hardship? If employees make pre-tax benefit elections through a section 125 cafeteria plan, then any mid-year election changes are governed by the cafeteria plan rules and the employer’s plan document. Technically, financial hardship without a change in employment status, change in residence, or other permitted status change won’t enable employees to change their pre-tax benefit elections. Changes to employees’ elections that aren’t made through a section 125 cafeteria plan are limited only by the terms of the employer’s plan document and any carrier requirements. Employers can amend their plans (other than cafeteria plans) to allow election changes because of financial hardship resulting from Hurricane Katrina but should confirm any changes with carriers before implementing them.

Can employees delay open enrollment elections because of Katrina? Employees who pay for benefits on a pre-tax basis through a cafeteria plan generally are required to elect those benefits before the beginning of the plan year during which they will be provided. However, these elections are considered time-sensitive actions, so employees in the broader disaster area may have until February 28, 2006, to make their elections. Thus, it appears that an affected employee participating in a cafeteria plan that operates on a calendar year basis could wait until February to make elections that would be retroactively effective to January 1, 2006.

Although the government extended these cafeteria plan deadlines, employers will want to consider whether their administrative systems and plan vendors are able to handle retroactive elections. Presumably, they could choose to let affected employees carry their 2005 elections into 2006, and then make an election in early 2006 that would take effect only prospectively.

What about employees who are unable to incur timely flexible spending account (FSA) expenses or use elective vacation days? Time-sensitive actions also include those related to elective FSAs and vacation days. Thus, affected employees who would have had to incur FSA-eligible expenses or use elective vacation days to avoid forfeiture (or vacation cash-out) between August 29, 2005 (August 25 for Floridians) and February 28, 2006, may have until February 28, 2006, to do so. As with the cafeteria plan elections, employers will want to consider their administrative capabilities in extending this flexibility to employees.

What are the COBRA implications for employees affected by Hurricane Katrina? Some employees may lose their employer group health plan coverage if they lose their jobs or become ineligible because of a reduction in work hours due to Hurricane Katrina. These employees will be entitled to continue their health coverage under COBRA.

Once employers notify qualified beneficiaries of their COBRA rights, the beneficiaries would normally have 60 days to elect to continue coverage, up to an additional 45 days to pay their initial premium, and up to 30 days to make each monthly premium payment thereafter. However, IRS and Labor Department guidance issued on September 19 extended these time frames for qualified beneficiaries affected by Hurricane Katrina. Plans and insurers must disregard the time period from August 29, 2005, through January 3, 2006, when determining the time limits imposed on the 60-day COBRA election period, as well as deadlines for COBRA premium payment and for participants to notify plans of a COBRA qualifying event or Social Security disability determination (GRIST #20050220, 9/19/05).

The relief applies to participants and beneficiaries who “resided, lived, or worked” in the core disaster area at the time of the hurricane, or were covered by a plan that was directly affected. A plan is directly affected if the plan sponsor’s principal place of business, plan administrator, or plan recordkeeper was located in the core disaster area.

Example. Before the hurricane, Erica was receiving COBRA continuation coverage under a group health plan. Monthly premium payments were due by the first day of the month. Erica made a timely August payment, but not a September payment, before the hurricane struck her home in the core disaster area. The period from August 29, 2005, through January 3, 2006, is disregarded for purposes of making premium payments. Erica’s premium payments for September, October, November, December, and January will be timely if made by 30 days after January 3, 2006 (which is February 2, 2006).

A DOL official has said the agency is currently studying whether KETRA extended the close of the time period that must be disregarded from January 3, 2006, to February 28, 2006. Additional guidance is expected to clarify the scope of the relief. If the time period is extended, the premium payments in the prior example would not be due until March 30, 2006 (30 days after February 28).

Will employees affected by Hurricane Katrina also have more time to exercise their HIPAA special enrollment rights? Yes. The HIPAA special enrollment rules generally allow employees to enroll in a group health plan when they lose other coverage or add a new family member as long as they request enrollment within 30 days of the special enrollment event. The IRS and Labor Department guidance, described in the Q&A above, states that the 30-day limit, including enrolling newborns and newly adopted children without pre-existing condition limits, must be disregarded by plans and insurers for the time period between August 29, 2005, and January 3, 2006 (or perhaps February 28). As noted above, this relief applies only to participants and beneficiaries in the core disaster area.

Do employees affected by Hurricane Katrina still need to file their employee benefit plan claims and appeals by their original deadlines? No. Many welfare and retirement plans impose limitations on how long a participant has to file an initial benefit claim or to appeal an adverse benefit determination, and these limitations must meet certain DOL-set minimum timeframes. But employees in Katrina’s core disaster area have more time to file. The IRS and Labor Department guidance (discussed in the preceding Q&As) prohibits plans and insurers from considering the time period from August 29, 2005, through January 3, 2006 (or perhaps February 28), when determining the dates by which a participant must file a claim or appeal under a plan’s claim procedures.

Example. Todd received a notification of an adverse benefit determination from his disability plan on August 10, 2005. The notification advised Todd that he had 180 days to file an appeal. Since Todd lived in the core disaster area, the period from August 29, 2005, through January 3, 2006, is disregarded in determining the 180-day period. Therefore, Todd’s last day to submit an appeal is 162 days after January 3, 2006 (which is June 14, 2006). (If KETRA extended the period to February 28, 2006, then the appeal would be due by August 9, 2006 (162 days after February 28).)

What are the tax implications for employees donating unused leave to help affected individuals? Generally, an employee who elects to transfer income (in this case, the value of the unused leave) to a third party would nonetheless be taxed on the income. However, under Rev. Rul. 90-29, employees who share unused leave with other employees for use during a medical emergency are not taxed on the value of the donated time. Because this relief is limited to donations for individuals experiencing medical emergencies, it may not fully cover all leave donations, since not all individuals affected by Katrina are experiencing medical emergencies.

The IRS has announced relief for participants in employers’ leave-based donation programs, under which employees may elect to forgo vacation, sick, or personal leave in exchange for employer contributions to charitable organizations that are helping Katrina victims (Notice 2005-68). Payments made by employers for this purpose are excludable from the donating employees’ gross income and wages, if made before January 1, 2007. Employers (not employees) may claim a tax deduction for these payments. The IRS has created a Web page to promote these leave donation programs but has not provided guidance on how to design them. When similar relief was available following the 9/11 attacks, we analyzed two design strategies that employers might want to consider – converting paid leave into unpaid leave or exchanging paid leave for extra cash that the employer contributes to charity (GRIST #20010357, 11/20/01).

What are an employer’s FMLA and ADA obligations? Injured, ill, or absent employees may have rights under the Family and Medical Leave Act (FMLA) and the Americans with Disabilities Act (ADA). In general, the FMLA grants eligible employees up to 12 weeks of job- and benefit-protected leave per year for serious medical conditions (physical or psychological) suffered by the employee or a close family member. The ADA prohibits disability-based employment discrimination and requires employers to provide reasonable accommodations to enable employees with disabilities to perform the essential functions of their jobs and access employee benefits. Employers also might consider extending their leave policies and other employee assistance programs beyond these minimum requirements. Of course, neither of these statutes will prevent an employer from suspending the pay and/or terminating the employment of employees affected by Katrina, as long as the decision is based on legitimate, nondiscriminatory factors and all similarly situated employees are treated the same.

Can employees use 401(k) or pension plan assets to help with their recovery? Responding to the pressing needs of Hurricane Katrina victims, on September 15 the IRS and DOL eased some of the restrictions on hardship distributions (and loans) from retirement plans, including 401(k), 403(b), and governmental 457(b) plans. Announcement 2005-70 allows plan sponsors to offer withdrawals before March 31, 2006, for any Katrina-related hardship, if the participant (or a family member) lived or worked in the core disaster area. Plan administrators may rely on participants’ representations as to the need for and amount of a hardship distribution, and need not follow strict substantiation procedures if they make a good-faith effort to comply. The relief in Announcement 2005-70 does not allow hardship distributions from accounts or plans that are prohibited from making in-service hardship distributions, such as QNEC accounts or money purchase plans (GRIST #20050213, 9/16/05).

Just a week after Announcement 2005-70, Congress enacted KETRA, giving employees greater access to retirement savings, without the 10% early withdrawal penalty, if they sustained a loss and lived in the Katrina disaster area (generally, the broader disaster area, but only if the disaster declaration was made by September 14, 2005). The new law permits participants to receive disaster-relief distributions (up to $100,000) before January 1, 2007. They may use an income-averaging mechanism to pay taxes ratably over three years, and they can avoid tax by re-contributing some or all of the amount during the three-year period. KETRA also doubles the usual Code limits on plan loans, permitting participants to borrow up to $100,000 or 100% of their vested accrued account balance. However, there is some confusion about this provision – in particular, whether loans that exceed 50% of a participant’s benefit are “adequately secured” as required by ERISA (GRIST #20050232, 9/23/05). DOL officials are working to resolve this issue.

With both Congress and the IRS scrambling to provide unprecedented relief for retirement plan participants, the result is set of complex and overlapping rules. In some respects, the relief in Announcement 2005-70 is broader (e.g., it applies to participants with relatives who lived or worked in the core disaster area, even if the participant lived elsewhere). In other respects, the KETRA relief is broader (e.g., it applies to a broader disaster area and to withdrawals after March 2006). Thus, when deciding how to structure a distribution program, plan sponsors (with the assistance of counsel) will have to carefully evaluate the legal constraints. Among the factors to consider: From what types of plans/accounts can distributions be made? When can the distribution be made? Does eligibility depend on the participant’s (or family member’s) place of employment and/or place of residence before the hurricane? Is the plan sponsor required to draw distinctions between different geographical parts of the Katrina-stricken area? What is the maximum amount of distribution? What amounts can be re-contributed to the plan and treated as a tax-free rollover?

If participants seek to access their 401(k) or pension plan assets but do not qualify for the relief described above, the normal loan and distribution rules continue to apply. This means that 401(k) or 403(b) plans that offer loans or in-service withdrawals (e.g., hardship, age 59-1/2, or withdrawal of rollover or after-tax contributions) may process these transactions, although employers may want to consider special accommodations such as streamlined application procedures. Distributions from traditional pension plans generally cannot be made until the employee terminates service or reaches normal retirement age, or the plan terminates. (We are awaiting IRS clarification on whether KETRA allows disaster-relief distributions from money purchase pension plans.) Loan provisions are not typical for larger defined benefit plans, although some employers might consider this option to deal with these extraordinary circumstances.

May participant loan repayments to 401(k) plans be suspended for Katrina victims? KETRA provides that any loan payments due on or after August 25, 2005, and before December 31, 2006, may be deferred for one year (with subsequent repayments appropriately adjusted), and the one-year period will be disregarded in determining the maximum term of the loan. This relief applies to plan participants who sustained a loss and lived in the Katrina disaster area (generally, the broader disaster area, but only if the disaster declaration was made by September 14, 2005). The KETRA extension should help avoid defaults on outstanding participant loans. The KETRA extension generally provides more relief than the extension for time-sensitive actions (including loan repayments) previously announced by the IRS (IR 2005-96; Rev. Proc. 2005-27). However, the IRS relief also applies to other time-sensitive actions, such as minimum required distributions and refunds of excess contributions.

Do any special retirement plan issues arise if an employer continues to pay employees displaced by Katrina? If an employer makes salary continuation payments, perhaps the most fundamental question is whether the individual has terminated employment or merely taken a leave of absence. The IRS may consider the individual to have terminated employment if the payments continue for an indefinite time, rather than just a temporary period, or if there is no expectation that the employee will resume work.

If the employment relationship is severed, this may raise issues concerning (among other things) the individual’s ability to defer salary continuation payments to a 401(k) plan, apply for retirement plan loans, request plan distributions while on salary continuation, or continue accruals under a pension plan.

Similar issues may arise if employees are called to military duty to help secure the disaster area, and the employer continues to provide “differential pay” to these individuals after they enter military service (GRIST #20050167, 7/15/05).

Are there any incentives for employers that want to hire Katrina victims? KETRA expands the Work Opportunity Tax Credit, allowing employers to claim the credit for hiring new workers who lived in the core disaster area on August 28, 2005. For workers hired at a location within the core disaster area, the credit will be available if they start work during the two-year period beginning August 28, 2005. For workers hired at a location outside the core disaster area, the credit applies only if they start work before the end of 2005. The maximum credit is $2,400 per employee (40% of qualified first-year wages up to $6,000).

KETRA also includes an “employee retention credit” to encourage small employers (under 200 employees) in the core disaster area to continue paying their workforce even though they were forced to shut down operations. Qualifying employers are entitled to a credit of up to $2,400 per employee (40% of wages up to $6,000 paid through the remainder of 2005).

FAQs about benefit plan compliance deadlines

The IRS, DOL, PBGC, and SEC have already extended some compliance deadlines for employee plans and their sponsors, with more extensions likely to follow. The FAQs below describe the relief announced to date.

What extensions are available for Form 5500 filing requirements? If a plan sponsor or administrator is located in the broader disaster area and has a Form 5500 filing due on or after August 29 (or August 25 for Florida), the filing deadline is extended to February 28, 2006, without penalty (IR-2005-112; DOL News Release 05-1848-DAL). The relief also applies to firms located outside the affected areas that are unable to obtain the necessary information from service providers, banks, or insurance companies whose operations were directly affected by Katrina. Form 5500 filers should use Box D to indicate that they were affected by Hurricane Katrina.

What relief is available to group health plans to issue HIPAA creditable coverage certificates and COBRA election notices? When individuals lose group health plan coverage, the plan generally must give them two documents – a HIPAA certificate that indicates the period for which they had “creditable” coverage, and a COBRA election notice which describes their rights to elect to continue their group health plan coverage. The plan normally must distribute these documents within specified time periods. However, the IRS and DOL have provided relief for group health plans directly affected by Katrina – i.e., where the plan sponsor’s principal place of business, the plan administrator, or plan recordkeeper was located in the core disaster area. Affected plans and sponsors can disregard the time period from August 29, 2005, through January 3, 2006, when determining the deadlines for issuing HIPAA certificates of creditable coverage and COBRA election notices. As with the COBRA and HIPAA deadlines noted above, the time period to be disregarded may be extended to February 28, 2006.

What funding relief is available for pension plans? The IRS, DOL, and PBGC have provided funding relief for pension plans affected by Katrina – e.g., if the sponsor, recordkeeper, or actuary is located in the core disaster area (Notice 2005-60). If a minimum or quarterly funding contribution deadline falls within the period from August 29 to October 30, 2005, the contribution may be postponed to October 31, 2005. The deadline for funding waiver applications is similarly postponed. A Treasury official has informally indicated that he believes KETRA has extended this deadline to February 28, 2006, but further agency guidance may be needed to confirm this extension. The funding relief is limited to “affected plans” in the core disaster area as strictly defined in Notice 2005-60. The Treasury Department rejected requests from certain employers located outside the core disaster area to extend their September 15, 2005, pension payment deadline.

What relief has the PBGC provided to affected pension plans? The PBGC has provided affected plan sponsors (and related parties) with an extension to January 3, 2006 – for premium payments, standard termination notices and distributions, participant notices, and some reportable event notices. The relief has important limitations. For example, the premium relief waives penalties but not interest. Also, the PBGC will grant relief only on a case-by-case basis for certain filings that involve a high risk of harm to plan participants or the PBGC – such as notices of large missed contributions (Form 200), advance notices of reportable events, and annual financial and actuarial information reports (section 4010 filings). The relief also addresses deadlines for requests for reconsideration or appeals, for distress terminations, and multiemployer plan filings.

What relief is available for employers depositing participant contributions or loan repayments in a retirement plan’s trust? Generally, participant contributions and loan repayments to an ERISA-covered retirement plan are considered plan assets and must be forwarded to the plan on the earliest date possible, but in no event later than the 15th business day of the month following the month in which the amounts were paid to or withheld by the employer. Some employers in the Katrina-stricken areas may have trouble forwarding the contributions and repayments to their plans. To address this problem, the DOL issued a statement on September 15 that it will not seek to enforce the requirement with respect to employers, plan sponsors, or plan service providers located in the core disaster area, to the extent that they acted reasonably, prudently, and in the interest of the employees. In the same guidance, the DOL waived a procedural requirement for implementing a temporary “blackout period” for requesting loans or distributions or directing investments. The DOL non-enforcement policy does not appear to apply to participant contributions to health and welfare plans that are required to be treated as plan assets.

Has Hurricane Katrina affected the IRS’s administrative timeline? The IRS has extended the deadlines that apply to its own agents and lawyers in matters involving taxpayers affected by Hurricane Katrina (Notice 2005-66, as amended by KETRA). Documents maintained by the IRS in the affected areas may have been destroyed, hindering the timely administration of government actions, including tax assessments and levies, tax refunds, and the filing of tax lawsuits. If the last date for the action is on or after September 6, 2005, the deadline is extended until February 28, 2006. The IRS will notify affected taxpayers of the government actions that will be delayed.

What relief has the SEC provided to affected companies and investors? The SEC has issued an exemptive order providing emergency regulatory relief to companies and investors affected by Hurricane Katrina. The order conditionally exempts affected persons from SEC filing and proxy delivery requirements. It also provides specified relief to registered investment companies and transfer agents. Finally, it conditionally waives certain “independence” requirements for auditors helping clients to reconstruct their accounting records.

FAQs about restoring business operations

There are many steps employers can take immediately and in the near future to speed their site, operational, and financial recovery. Mercer’s sister companies, Marsh and Kroll, have prepared an outline of issues relating to security, environmental concerns, business continuity, crisis management, data recovery, and claims management. Of course, HR managers will have their own priorities. Here are some FAQs that have already surfaced.

What if an employer or its vendor cannot pay wages promptly? Many states require the payment of wages within prescribed time limits. For example, Louisiana gives employers up to 10 days after the close of a payroll period. Employers should consult legal counsel or state authorities and websites to ascertain their obligations and whether the state is providing any relief from its prompt-payment requirements.

What relief from federal labor laws is being offered to facilitate rebuilding? In a politically controversial move, President Bush has suspended Davis-Bacon Act requirements for federally funded construction projects that are awarded on or after September 8 and performed in locations hardest hit by Hurricane Katrina. The suspension relieves construction contractors of the obligation to pay local prevailing wages, but it does not eliminate other wage and hour protections, such as the Fair Labor Standards Act overtime and recordkeeping requirements. In addition, the Labor Department’s Office of Federal Contract Compliance Programs is waiving, for three months, the requirement that federal contractors adopt written affirmative action plans. The waiver applies only to contractors working on Katrina-related projects and does not affect their obligation to comply with other equal employment opportunity laws.

If an employer is trying to hire an individual who has lost all documentation in the hurricane, must it still comply with all the I-9 requirements? On September 6, the Department of Homeland Security (DHS) announced it will not sanction employers for hiring Katrina victims who, at this time, are unable to provide documentation normally required to complete Form I-9 (Employment Eligibility Verification). US employers are responsible for completing and retaining Form I-9 for individuals they hire. Because they have evacuated their homes and lost personal items, many Katrina victims lack the documents that verify employment eligibility and establish identity. Employers will still need to complete the I-9 to the extent they can, but they should record that the documentation normally required is not available because of events related to Hurricane Katrina. This policy will be in place for 45 days, after which DHS will make further recommendations.

What if an employer has to shut down part of its business or lay off employees? Employers cutting back business operations must take care to comply with state laws, collective bargaining agreements, and federal labor laws, such as the National Labor Relations Act (NLRA) and the WARN Act. For example, the NLRA may require an employer to negotiate with employees’ unions over the consequences of a layoff, plant closing, or reduction in hours of work. Under the WARN Act, an employer generally must provide affected employees with 60 days’ notice before carrying out a “mass layoff” or “plant closing.” It is possible that layoffs and closings caused by Katrina will be exempt from the WARN Act, but this is not entirely clear. Employers should consult legal counsel in making these important business decisions.

Additional relief coming

With Congress and the federal agencies mobilizing in support of the Katrina victims, there will undoubtedly be more relief on the way. Government policymakers face a tough challenge as they seek to balance the pressing needs created by this crisis with longer-term tax and benefits policies. Business groups (and individual companies) continue to press for removal of regulatory obstacles to recovery. These might include, for example, further easing of election and documentation requirements, or nondiscrimination rules that prevent employers from offering certain counseling, health care, disability, death, and transportation benefits on a tax-favored basis. Employers also may seek changes in law to facilitate make-up contributions to retirement plans, below-market loans to employees, and waiver of premiums on behalf of employees.

Now that KETRA has been signed into law, Congress is working on a new round of tax legislation to help Hurricane Katrina and possibly Hurricane Rita victims, which may include additional benefits provisions.

House Ways and Means Committee Chairman Bill Thomas (R-CA) and his colleagues on the panel from both parties are working on measures to address both victims’ immediate needs and longer-term recovery initiatives. In addition, House Education and the Workforce Committee Chairman John Boehner (R-OH) has introduced a bill (HR 3862) to give the DOL authority to craft ERISA waivers or exemptions that correspond to the liberalized tax rules just enacted in KETRA. It’s not clear whether the DOL already has authority to address the issue or whether it will do so in the coming weeks. Chairman Boehner’s bill also would protect plan fiduciaries from liability if they deviate from plan terms to implement the relief prescribed by DOL.

In the Senate, the Finance and the Health, Education, Labor and Pensions (HELP) Committees are developing legislation to address the health care needs of hurricane survivors. A bill (S 1716, the Emergency Health Care Relief Act) introduced by the Finance Committee on September 15 focuses largely on delivering relief through Medicaid but would also set up a fund to help pay the health insurance premiums of hurricane survivors with private health insurance. On September 26, the HELP Committee introduced a bill (S 1769) that includes a similar provision. While no similar provisions are currently pending in the House, these or similar items could well find their way into the next package that lands on President Bush’s desk.