In the wake of Hurricanes Harvey, Irma and Maria, Congress enacted the Disaster Tax Relief and Airport and Airway Extension Act of 2017.
The Act makes it easier for retirement plan participants to access their retirement funds to recover from Hurricanes Harvey, Irma and Maria. The Act:
- Waives the 10% additional tax under Internal Revenue Code (IRC) Section 72(t) on certain early distributions
- Allows recipients to include qualified hurricane distributions in their income over a three-year period
- Allows participants to repay their distribution to the plan
- Expands availability of plan loans
- Extends the normal loan repayment period under the plan
- Extends the period for plans to make amendments
The Act waives the 10% additional tax under IRC Section 72(t) for “qualified hurricane distributions,” and permits participants to repay these amounts to a plan. Ordinarily, most distributions to a participant under age 59½ are subject to this additional tax. However, under the Act, distributions up to $100,000 to an individual whose main home is in the disaster area for the applicable storm dates (for example, August 23, 2017, for Hurricane Harvey) to 2019, qualify as hurricane distributions exempt from this 10% additional tax.
Early distributions would ordinarily be taxable to the recipient in the tax year which includes the distribution date. The Act allows these qualified hurricane distributions to be prorated over the three-year period beginning with the tax year including the distribution date, unless the taxpayer chooses otherwise.
Other than a loan, a plan distribution usually can’t be repaid, unless it qualifies as an eligible rollover distribution. Hardship distributions, which are usually invoked in a disaster, are not so eligible. But under the Act, an individual who receives a qualified hurricane distribution may make one or more contributions to repay the distribution to an eligible retirement plan, during the three-year period after receiving the distribution. This repayment would be treated as a trustee-to-trustee transfer made within the 60-day time frame under applicable regulations.
The Act also expands the availability of plan loans and extends the normal repayment period. Under IRC Section 72(p), loans from a plan to a participant are subject to a variety of limitations, primarily an overall $50,000 limit on the outstanding amount, and the requirement of repayment at least quarterly within 5 years. The Act provides relief from both.
A qualified individual can borrow up to the lesser of $100,000 or 100% of the account balance or accrued benefit. The required repayments over 5 years can be delayed for an extra year, without regard to terms remaining under prior loans, provided the repayments are adjusted for interest.
Plan terms regarding loans and in-service and hardship distributions are optional provisions, and many plans do not contain them. Those that do recite existing statutory language requirements, such as the $50,000 maximum loan amount. Without appropriate plan provisions, a plan could not make either available to a participant trying to recover from a disaster. Plan sponsors have until the last day of the first plan year beginning in or after 2019 to amend their plans to provide either or both distribution options to employees. However, when amendments are made, they must apply retroactively. Governmental plans have two years beyond this date to make this amendment.