- November 5, 2024
It seems like every few days we see and hear news about natural disasters impacting different areas of the United States. Whether it’s a hurricane, flood, tornado, wildfire, mud slide or severe storm, almost everyone knows someone who has been impacted by these types of events. While it is not possible to prevent these catastrophes from occurring, plan participants can now more easily access their retirement plan savings after a disaster occurs to help alleviate the economic consequences.
Recent federal retirement plan legislation commonly referred to as SECURE 2.0 grants retirement plan sponsors the discretion to allow plan participants greater access to their retirement plan savings in the event of a federally recognized disaster. Prior to SECURE 2.0, Congress would enact such relief on a disaster-by-disaster or year-by-year basis. However, now, once the President declares that a major disaster has occurred within a specific geographic area, relief is available in several different ways generally for a period of approximately six months after the disaster declaration occurs. During that time period, individuals who reside in the disaster area and have sustained an economic loss (“qualified individuals”) can avail themselves of the following types of relief.
Qualified Disaster Recovery Distributions
A plan sponsor has the discretion to allow qualified individuals to receive “qualified disaster recovery distributions” of up to $22,000 per disaster (“QDRD(s)”). Further, any such distribution is exempt from the 10% early distribution penalty tax that often applies to retirement plan distributions if the recipient is under age 59-1/2.
Other favorable treatment of QDRDs include that they are taxed ratably over three years, starting with the distribution year. However, the recipient can elect to include the entire amount in income in the year of the distribution if he or she so desires. In addition, QDRDs may be repaid to the plan at any time during the three-year period beginning on the day after the distribution. Finally, although a QDRD can be repaid to the plan, it is not considered an “eligible rollover distribution” for certain purposes, such as notice requirements and withholding.
Increased Loan Limits
Plan sponsors with retirement plans that offer plan loans may choose to allow qualified individuals to borrow more from their retirement plans. Normally, a plan participant is permitted to borrow 50% of his or her vested account balance up to $50,000 and, generally, such loan must be repaid within a five-year period. However, under this guidance, a qualified individual may borrow 100% of his or her vested account balance up to $100,000 and extend the loan repayment period by an additional year.
Hardship Distributions
While not a SECURE 2.0 provision, it is appropriate to remind plan sponsors that hardship distributions also become available upon a plan participant experiencing a major disaster. More specifically, if a plan sponsor allows for hardship distributions and employs the safe harbor definition of what constitutes a hardship (which the vast majority of retirement plans do employ), plan participants may take hardship distributions for expenses and losses (including loss of income) resulting from a major disaster. To be eligible, the participant’s principal residence or principal place of employment at the time of the disaster must be located in an area designated by the Federal Emergency Management Agency (“FEMA”) as eligible for individual disaster assistance.
We hope that this article helped you to better understand this topic. However, this article is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.