Retirement Distribution Relief for Federal Disasters

Senators Bill Cassidy (R-LA) and Robert Menendez (D-NJ) have introduced legislation that would make permanent certain rules for distributions and loans from retirement plans and IRAs in connection with federally declared disasters. This legislation is intended to aid victims by providing consistent treatment of and improving response times associated with disaster relief.

The proposal follows previous disaster distribution guidance and provides for a waiver of the 10 percent early withdrawal penalty tax on distributions of up to $100,000 per disaster made to those who have a primary residence in the affected area and have sustained an economic loss. The relief would apply to distributions on or after the first day of the incident period of the disaster and within 180 days after the later of either the incident period, the date of enactment, or the applicable disaster declaration. The proposal also allows the taxpayer to treat the distribution as income ratably over a three-year period, as well as to recontribute the distribution to a plan or IRA within three years.

Additionally, the bill would allow recontributions of withdrawals for home purchase or construction in the event that the assets were not used for that purpose. The maximum amount available for a plan loan would also be increased to the lesser of $100,000 or the greater of $10,000 or 100 percent of the nonforfeitable benefit of the participant. A one-year extension of loan repayments would also be permitted for loan payments due on or after the first incident date of the disaster and within the subsequent 180-day period.

The bill was referred to the Senate Committee on Finance. It will be monitored for further developments.