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New Hurricane Legislation Grants Additional Distribution, Withdrawal and Loan Relief for Certain Retirement Plan Participants

Summary

The new Disaster Tax Relief and Airport and Airway Extension Act of 2017 provides additional relief and flexibility for retirement plan participants impacted by recent hurricanes, including relaxed rules for plan distributions, withdrawals and loans.

In Depth

The recent Disaster Tax Relief and Airport and Airway Extension Act of 2017 provides additional relief and flexibility for retirement plan participants impacted by Hurricane Harvey, Hurricane Irma and Hurricane Maria, including relaxed rules for plan distributions, withdrawals and loans. The relaxed rules are available to any tax-qualified retirement plan with a “qualified individual,” who had a principal residence in a disaster area on a specified date for each hurricane. The Internal Revenue Service (IRS) has not yet provided needed guidance on the new law. The new law is in addition to hurricane relief recently announced by the IRS, Pension Benefit Guaranty Corporation and Department of Labor.

Qualified Individual

A “qualified individual” is a person who had a principal residence on the “qualified beginning date” in a hurricane “disaster area,” and who sustained an economic loss due to that hurricane. The new law only applies to plan participants, unlike earlier hurricane relief announced by the IRS which also applies to family members. For Hurricanes Harvey, Irma and Maria, a “disaster area” means a major disaster area declared by the president of the United States. A list of such areas may be found at www.fema.gov/disasters.

The “qualified beginning date” is different for each hurricane:

  • August 23, 2017 for Hurricane Harvey

  • September 4, 2017 for Hurricane Irma

  • September 16, 2017 for Hurricane Maria

Hurricane Withdrawals and Distributions

The new law waives the 10 percent penalty tax on in‑service withdrawals and distributions that are received by a qualified individual (defined above) from a tax-qualified retirement plan, including a plan covered under section 401(k) or 403(b) of the Internal Revenue Code. Normally, the 10 percent penalty tax applies to a post-service distribution received before age 55 or to an in-service withdrawal received before age 59-1/2. The new legislation removes the 10 percent penalty tax on hurricane distributions or withdrawals, up to $100,000 (reduced by any other qualified hurricane distribution). To avoid the tax penalty, the qualified individual must receive the withdrawal or distribution on or after the qualified beginning date (defined above) and before January 1, 2019. In calculating the maximum amount available for tax penalty relief, all distributions and withdrawals to the qualified individual during this period are aggregated, including withdrawals and distributions from all retirement plans in the employer’s controlled group.

As part of the hurricane relief, income inclusion occurs ratably over a three-year period, beginning with the year the hurricane distribution or withdrawal is received. In other words, a qualified individual may spread out his or her tax payments on qualified hurricane withdrawals or distributions over three years. Qualified hurricane withdrawals and distributions also are subject to different withholding rules, and not subject to the 20 percent mandatory withholding that normally applies.

Hurricane withdrawals and distributions can be repaid by a qualified individual within three years. If repaid, the withdrawal or distribution will be treated as a rollover and will not be subject to income tax. Qualified hurricane distributions and withdrawals, however, are reported for tax purposes in the year the withdrawal or distribution is received. As of yet there is no guidance on how to reverse the income tax on amounts received, but it is likely that a qualified individual will need to file an amended tax return for the year the hurricane withdrawal or distribution was received.

Repayment of Unused Hardship Withdrawal for Disaster Area Residence

If a qualified individual received a hardship distribution between February 28, 2017, and September 21, 2017, for the purpose of purchasing or constructing a principal residence within a hurricane disaster area, but the individual did not purchase or construct that residence on account of a hurricane, he or she may repay the hardship distribution on or before February 28, 2018. If repaid, the hardship distribution will be treated as a rollover as described in the previous paragraph. Like repayment of hurricane withdrawals and distributions, there is no guidance yet on the mechanism for the taxpayer to reverse the earlier tax on his or her hardship withdrawal.

Hurricane Loan Limits and Repayment Holiday

The new law doubles the maximum amount a qualified individual may borrow from a 401(k) plan or other tax-qualified qualified plan. A qualified individual may borrow the lesser of $100,000, or 100 percent of the qualified individual’s vested benefit under the plan (reduced by prior loan balances). Without the new law, the loan limit for tax-qualified retirement plans is the lesser of $50,000 or 50 percent of the participant’s vested benefit under the plan (reduced by prior loan balances). To qualify for the higher loan limits, a tax-qualified retirement plan must make the loan to a qualified individual between September 29, 2017, and December 31, 2018.

For new plan loans to qualified individuals on or after the qualified beginning date, payments due before 2019 may be delayed for one year. In addition, for existing loans to qualified individuals, loan repayments due before 2019 may also be delayed for one year. Interest will continue to accrue during the grace period, and the loan must adhere to all other rules that normally apply to retirement plan loans.

Hurricane Plan Amendments and Next Steps

If the sponsor of a tax-qualified retirement plan wants to provide the relief described above to qualified individuals, plan operations must comply with the new law, and the plan likely will need to be amended by the end of the first plan year beginning after January 1, 2019 (or by December 31, 2019 for a retirement plan with a calendar fiscal year). Given the prior regulatory guidance following Hurricane Katrina, the IRS may issue model amendments or otherwise assist plan sponsors in adopting plan amendments.

© 2019 McDermott Will & Emery

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About this Author

Diane M. Morgenthaler, Corporate Tax Planning Attorney, Retirement Plans for Companies, McDermott Will Emery, Chicago Law Firm
Partner

Diane M. Morgenthaler focuses her practice on employee benefits and executive compensation. She represents clients in matters before the US Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation.

Diane serves as employee benefit counsel to Fortune 500 corporations and other global corporations, and represents both public and private clients. She regularly designs and implements a variety of employee benefit plans and programs. Diane has extensive experience in employee benefit issues involved in...

312-984-7676
Partner

Alan D. Nesburg is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  He focuses his practice on a wide range of employee benefit matters, including qualified pension and profit-sharing plans, deferred compensation, and group benefits programs.  His clients include both public and private businesses.

312 984 7642
Stephen Pavlick Employee BenefitsLawyer, McDermott Will Emery Law firm
Partner

Stephen Pavlick is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C. office.  He focuses his practice on the area of employee benefits matters for large multinational corporations.  His clients include several Fortune 100 companies and a major trade association.  He is a member of the Tax Management Advisory Board for Compensation Planning and is a regular participant at their monthly luncheons with government officials.  Stephen is a Certified Public Accountant. 

Mr. Pavlick concentrates on qualified...

202-756-8312
stepanovic, chicago, associate
Associate

Rick Stepanovic focuses his practice on employee benefits and executive compensation matters. He has experience working on matters related to tax-qualified pension plans, health and welfare plans, and deferred compensation arrangements. He also has experience handling correction and administrative matters before the Internal Revenue Service and the Department of Labor.

While in law school, Rick was the Managing Editor of the Michigan Journal of Environmental and Administrative Law. He previously worked as a law clerk in the US Attorney’...

312-984-2054