Similar to its hurricane disaster response more than a decade ago, Congress has acted to give relief to victims of Hurricanes Harvey, Irma, and Maria. Initial responses by the Internal Revenue Service (IRS), Department of Labor (DOL), and Pension Benefit Guaranty Corporation (PBGC), extended many tax-related deadlines for hurricane victims. These actions are now followed by enactment of the Disaster Tax Relief and Airport and Airway Extension Act of 2017.
How Legislation Affects IRAs and Employer Plans
Under the provisions of the new law, “qualified hurricane distributions” from IRAs, qualified retirement plans, 403(b) plans, and governmental 457(b) plans are entitled to special tax treatment, as well as repayment options if the recipient so chooses. There are also provisions that apply specifically to loans from employer plans.
Employer plans are not required to offer qualified hurricane distributions or the relaxed loan parameters, but can elect to offer them.
Qualified Hurricane Distributions
Individuals with a principal residence within a presidentially-declared disaster area affected by Hurricanes Harvey, Irma, or Maria may request qualified hurricane distributions from their IRAs or from their employer plans (plan permitting). Qualified hurricane distributions are those distributions taken during a specified time period, described below.
|Hurricane||Relief Area||Distribution taken after||Distribution taken before|
|Irma||Florida, Georgia, U.S. Virgin Islands, Puerto Rico, and Seminole Tribe of Florida||9/4/2017||1/1/19|
|Maria||U.S. Virgin Islands and Puerto Rico||9/16/2017||1/1/19|
Qualified Hurricane Distribution Relief Granted to Individuals
Designating a withdrawal request as a qualified hurricane distribution allows an individual to
- withdraw amounts up to $100,000, aggregated across all IRAs and employer plans;
- avoid mandatory 20 percent withholding on distributions from qualified plans, 403(b) plans, and governmental 457(b) plans;
- pay taxes on the distribution “ratably” (equally) over three years, beginning in the tax year of distribution, or elect to pay all taxes in the current year;
- avoid the 10 percent early distribution penalty;
- roll over the qualified hurricane distribution into any eligible IRA or employer plan, within a 3-year window, starting on the day after the distribution is received; and
- repay hardship distributions for purchase or construction of a principal residence taken after August 23, 2017, if the purchase or building was cancelled because of hurricane events. Repayment must be completed by February 28, 2018, and can be made to any eligible IRA or employer plan.
The new law also allows employer plans to relax the loan limitation for participants with a principal residence in the hurricane areas. If permitted, affected participants can request a loan from their 401(k) plan or other employer plan up to a maximum request of $100,000 instead of the standard $50,000 and the 50 percent-of-vested-account-balance limitation will not apply.
Plan loan payments for qualified individuals may be delayed up to one year, and the maximum five-year loan amortization period for nonmortgaged loans is similarly extended by one year.
What is Required
Plan sponsors must determine if they will permit qualified hurricane distributions and if they will allow the expanded loan provisions. They may need to prepare a document amendment. If an amendment is required, plans may retroactively amend for these features by the last day of the 2019 plan year. Plan sponsors must inform participants of their options under the hurricane relief provisions.
IRA and employer plan service providers should evaluate forms, systems, and workflow processes to support qualified hurricane distributions, loan exceptions, and potential repayment and rollovers. For example, the legislation states that the notice given to recipients of eligible rollover distributions need not be provided with a hurricane-related distribution but other distribution consent and notice requirements still apply.
Following enactment of the Katrina Emergency Tax Relief of 2005, subsequent IRS guidance provided details for interpreting that legislation. In the coming days or weeks, we expect similar agency guidance to further interpret the new law. Ascensus will monitor and provide additional details on Ascensus.com as new information is released.