The term “disaster relief” invokes the image of the Red Cross and other care organizations rushing in with food, blankets, medical care and temporary housing to those impacted by an earthquake, flood, hurricane, or fire.. But when it comes to a retirement plan, what is relief for a disaster?
What Relief Can a Retirement Plan Provide?
Under a qualified retirement plan, including 401(k) plans and 403(b) plans, or an IRA, disaster relief generally means the ability of a qualified individual to
- Take a distribution from the plan;
- Pay back certain distributions from the plan that were not used for their intended purpose; and
- Get limited plan loan relief
How Does Disaster Relief Become Available?
Prior to the SECURE Act 2.0 of 2022, disaster relief was implemented for retirement plans on a disaster-by-disaster basis:
- A disaster would hit an area;
- The federal government would officially declare the impacted location a disaster area:
- The IRS would come out with a disaster relief announcement for those living in the declared disaster area;
- Each retirement plan sponsor would have to decide whether to offer the disaster relief to participants (generally based on whether plan participants were impacted); and
- At some point an amendment to the plan would be adopted if the relief was being implemented.
Every single disaster. For example, see the relief issued for Hurricane Katrina in 2011.
After SECURE 2.0, this process has become much more streamlined, basically eliminating steps 3 and 5 above, and standardizing what relief is available, helping affected participants and plan sponsors alike. SECURE 2.0 provides that, for disasters declared on or after January 26, 2021, the IRS no longer has to individually declare disaster relief for each disaster, and the plan sponsor does not have to adopt individual amendments. A single amendment for disaster relief can be adopted, and then when the federal government declares a federal disaster area, the relief provisions will automatically apply to participants living in the disaster area. The amendment for the general disaster relief provisions to a plan will be adopted once, as part of the SECURE 2.0 amendments, which are due by December 31, 2026.
While the type of relief described below will no longer be issued on disaster-by-disaster basis, the IRS will issue other types of disaster relief on occasion, mainly to permit extended deadlines to file returns, including Form 5500s, such as the recent relief announced for West Virginia due to the effects of Tropical Storm Helene.
The specifics on what relief can be offered under a retirement plan will be discussed in Part 2 of our discussion of this topic.