A qualified retirement plan may make a Qualified Disaster Loan to a qualified individual up to $100,000 from December 27, 2020, until June 25, 2021.
The Consolidated Appropriation Act (CAA) defines qualified disasters as a major disaster that the President declares during the period beginning on January 1, 2020, and ending on February 25, 2021, but which must have occurred between December 28, 2019, and on or before December 27, 2020, and during the period specified by the Federal Emergency Management Agency (FEMA) as the period during which the disaster occurred (the “Incident Period”). The Qualified Disaster definition applies to qualified disaster distributions from qualified retirement plans, qualified disaster employee retention credits, and qualified disaster loans to participants from qualified retirement plans. A major disaster for this purpose does not include any area with respect to which a major declared disaster was declared only because of a COVID-19 incident.
A qualified disaster distribution is a distribution from a qualified retirement plan that is made on or after the first day of the Incident Period (which must occur between December 28, 2019, and December 27, 2020) and after the date on which the area in which FEMA declares the principal place of residence of the participant requesting such distribution to be a federal disaster area, provided the distribution is made before June 25, 2021 (the date 180 days following enactment of the Act).
A qualified disaster distribution can be available, if the plan so provides, for each qualified disaster occurring to the participant’s principal place of abode, if the disaster occurred during the time frames above defining a Qualified Disaster and the Incident Period and provided the disaster occurred for the individual during the period specified by FEMA.
A qualified disaster will permit a qualified disaster distribution from a qualified retirement plan to an impacted individual. The 10% additional tax penalty under Code section 72(t) will not apply to a qualified disaster distribution from a qualified retirement plan as long as the requirements are satisfied. Such a distribution must not exceed $100,000 less the aggregate amount of prior distributions treated as qualified disaster distributions to the individual participant in all prior years from all plans maintained by all employers in the controlled group.
Plans are not required to include or to offer to plan participants. However, if a plan chooses to offer qualified disaster distributions, the addition of the qualified disaster distribution option will not impact the plan’s tax qualification as long as the plan ensures the $100,000 limit on qualified disaster distributions to one individual from all plans in the controlled group.
Employees who take a qualified disaster distribution may repay the plan’s distribution within the three-year period beginning on or after the date they received the funds. Such repayment may occur in more than one payment. The repayment can be made up to the amount of the distribution but may not include any earnings. If the qualified disaster distribution is transferred to the participant’s individual retirement account, the individual may re-contribute funds to the plan from which the participant received the qualified disaster distribution directly from the individual retirement account holding the distribution.
To be a qualified disaster distribution, the distribution must occur on or after the date of the incident of a qualified disaster impacting the participant’s principal place of residence and prior to June 25, 2021. The income the individual recognizes from the qualified disaster distribution is automatically spread over three years, beginning with the tax year of the distribution, unless the individual elects otherwise.
Qualified Disaster Loans to Retirement Plan Participants
A qualified retirement plan may make a Qualified Disaster Loan to a qualified individual up to $100,000 from December 27, 2020, until June 25, 2021. The requirement that the loan does not exceed one-half of the participant’s vested account balance is replaced, and the Qualified Disaster Loan is limited to the present value of the nonforfeitable accrued benefit of the employee under the plan. For an individual to be qualified to receive this higher loan amount, the individual’s principal place of residence at any time during the Incident Period for a Qualified Disaster must be located in the qualified disaster area, and the individual must have suffered an economic loss from the Qualified Disaster.
Participant Loan Payment Delay for Qualified Disasters
CAA amends the requirements for participant loan repayments in the event of a qualified disaster for a qualified individual. If a Qualified Disaster occurs with respect to a qualified individual with a loan that is outstanding during the Incident Period, such qualified individual’s loan payments are delayed automatically from the first day of the Incident Period to 180 days after the last day of the Incident Period of the Qualified Disaster. These loan payment delays only apply to participants whose principal residence is located in the qualified disaster area at the time of the qualified disaster, and it only applies if the individual sustained an economic loss as the result of the qualified disaster. As a reminder, plan administrators will not know for whom loans must be delayed without obtaining information about the participant’s principal residence, the applicable qualified disaster, and specific details on the individual’s economic loss.
Re-Contributions of Distributions for Qualified First-Time Homebuyers
The Act adds a provision permitting re-contribution of amounts withdrawn for first-time home purchases without the imposition of the additional 10% penalty tax. This re-contribution must be completed during the “applicable period.” In the case of a principal residence in a qualified disaster area, the re-contribution of first-time homebuyer distributions must occur during the period beginning on the first day of the Incident Period and ending on June 25, 2021.
We will continue to provide additional updates regarding this topic. There is a lot of available information available to assist taxpayers experiencing disaster-related financial difficulties to be aware of these options and get assistance. Contact us today to review your options.
Maria is a Partner at Wilke & Associates, servicing closely-held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.