Legislation Provides Retirement Plan Relief to Hurricane Victims

Recently enacted legislation (the Disaster Tax Relief and Airport and Airway Extension Act of 2017) and recently released guidance provide retirement plan relief for hurricane victims (including Hurricanes Harvey, Irma and Maria). The legislation specifically relates to retirement plan distributions and loans. On distributions, the 10 percent penalty tax would not apply to qualified hurricane distributions taken by individuals whose principal residence is in a hurricane area (as designated by the President) and who sustained an economic loss due to the hurricane. These non-penalized distributions must be taken between the hurricane start date and Jan. 1, 2019, and are limited to an aggregate of $100,000 (whether received in one or more taxable years). Such distributions can be repaid (in whole or in part), through contributions to the retirement plan. Repayments would be treated as timely rollover contributions, which has the effect of deferring taxation. Instead of repayments, individuals can elect to spread the applicable distribution taxation over a three-year period.

The legislation also provides a special rule relating to hardship withdrawals taken within certain specified dates to build or buy a house in a hurricane area (but only if the withdrawals were not used to build or buy the house because of the hurricane). Specifically, all or a part of the hardship withdrawal amount may be repaid or contributed to an eligible retirement plan on or before Feb. 28, 2018. In that case, the repayment will be treated as a timely rollover contribution.

For loans taken between Sept. 29, 2017, and Dec. 31, 2018, the legislation increases the plan loan limit to $100,000, or 100 percent of an individual’s vested account balance. To take advantage of the increased plan loan limit, the individual must have a principal residence in the hurricane area and must have suffered an economic loss due to the hurricane. Also, such individuals may delay for one year the due date for outstanding loan payments.

Retirement plan sponsors should review their plan designs and work with employees who may have been impacted by any of these three hurricanes. Ultimately, employers may need to work with outside counsel to ensure the relief described above is properly administered.

Disaster Tax Relief and Airport and Airway Extension Act of 2017 »