Recent Disaster Relief Changes with Retirement Plans

on "July 02, 2020 3:53 pm"

How does the recently added safe harbor hardship distribution reason apply for an individual who has been affected by a federally declared disaster? What tax relief is available for retirement plan disaster distributions?

By Cindy Fairchild, Ascensus QKA 

The Bipartisan Budget Act of 2018 (BBA) added a safe harbor reason to the “immediate and heavy financial need” hardship distribution requirement that permits an employee to request a hardship distribution to cover expenses and losses (including loss of income) incurred by the employee because of a Federal Emergency Management Agency (FEMA) declared disaster. This safe harbor reason applies if the employee’s principal residence or principal place of employment at the time of the disaster was in an area designated by FEMA for individual assistance with respect to the disaster. 

What does it mean to be eligible for “individual assistance”? 

For the safe harbor reason noted above to be used, FEMA must declare the area designated by FEMA to be eligible for individual assistance. Most often, disaster declarations are sought by states, so federal financial assistance can be obtained for both individuals and public entities in a disaster-stricken area. When a disaster is approved, FEMA can choose to declare the disaster coverage for public assistance, individual assistance, or both. Either or both will be shown for the specific disaster on the FEMA website with the following wording.   

“Individual assistance, dollars approved – If and when individual assistance money is approved for this disaster, it will be displayed here. Information is updated every 24 hours.” 

“Public assistance, dollars approved – If and when public assistance obligated dollar information is available for this disaster, it will be displayed here. Information is updated every 24 hours.” 

If an employee resides in a FEMA-declared disaster area approved for individual assistance due to COVID-19 and the employer does not allow coronavirus-related distributions (CRDs) but does allow for hardship distributions (or another distribution triggering event), will the tax and repayment benefits of a CRD apply to the distribution?  

Yes. If the distribution is taken between January 1, 2020, and before December 31, 2020, and is below the $100,000 aggregate limit, an employee can self-certify the distribution as a CRD as long as he or she meets the definition of a “qualified individual” under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The tax benefits are the 10 percent early distribution penalty tax exception, the option of the distribution to be taxed ratably over a three-year period, and repayment of the distribution within the three-year period.   

What other tax relief is available for retirement plan disaster distributions? 

The Further Consolidated Appropriations Act, 2020 (FCAA) contains the Taxpayer Certainty and Disaster Tax Relief Act of 2019, which provides disaster relief to individuals in presidentially-declared disaster areas who have taken IRA and retirement plan distributions on or after January 1, 2018, and before June 17, 2020. If this relief is adopted by the plan (a plan document amendment is required), qualifying distributions of up to $100,000 from employer-sponsored retirement plans and IRAs are exempt from the 10 percent early distribution penalty tax and normal withholding requirements. In addition, individuals may repay qualifying distributions within a three-year period (beginning on the date that the distribution is received), and the individual has the option to have the distribution taxed ratably over a three-year period. 

  Relaxed loan requirements are also available under this law. Employers may allow participants to request a plan loan of up to $100,000 and to delay loan repayments for up to one year.

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