In Part 1 of our discussion of this topic, we explained how disaster relief gets “triggered” and how it can be implemented. In Part 2, we will dive into more detail about the relief that can be offered and what employers can or must do.
What Relief Can a Retirement Plan Provide?
As we discussed in Part 1, 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
Distributions:
New Distribution Event. Any qualified federally-declared disaster will automatically trigger disaster relief and up to $22,000 can be withdrawn from the plan (or IRA) by qualified individuals who are affected by a qualified federally declared disaster. The distribution must be taken within 180 days of the later of the first day of the major disaster or the date the disaster is declared.
Penalty and Tax Relief. These distributions can be taken without having to pay the 10% penalty that applies to distributions taken before the age of 59 ½, and rather than taking the income tax hit all in the year of distribution, the affected participant can include the full distribution in income equally over 3 years.
Repayment Possible. Disaster Relief Distributions which are repaid within 3 years from the date they were distributed, will be treated as though they were a direct trustee-to-trustee transfer (i.e., a rollover) so there is no federal income tax on the distribution.
Compared to Hardship Distributions. This distribution relief can be very helpful in offsetting the economic hardship of both the disaster and the distribution, more broadly than a traditional hardship distribution. Remember, a traditional hardship distribution is only available if there is an immediate and heavy financial need (and many plans limit that to certain specified situations under safe harbor criteria), and is limited to the amount necessary to address the need. While a hardship distribution is penalty free, it is fully included in income in the year of the distribution and may not be paid back to the plan. The employer’s plan may also have other limitations such as whether hardship distributions are even available, what accounts are available for a hardship distribution, and limits on the amount of a hardship distribution.
Repayment of Other Distributions
Understanding that a participant’s plans may change due to a qualified federally-declared disaster, distributions that had been taken to purchase or build a principal residence that is now unfortunately in a qualified disaster area can be paid back and the repayment treated as a rollover (like the repayment of a disaster relief distribution) as long as the repayment is made within 180 days of the first day of the incident period, the date of the disaster declaration, or December 29, 2022, whichever is later.
Loan Relief
Employers may give qualified individuals up to an additional year to pay back a participant loan that was outstanding on or after the later of December 29, 2022, the first day of the incident period, or the date of the disaster declaration. Note that interest will still accrue during this additional time period.
Also, employers may increase the loan limit for qualified individuals. The maximum loan amount is generally the lesser of $50,000 or 50% of the participant’s vested account balance. The disaster relief permits the employer to allow up to $100,000 or 100% of the qualified individual’s vested account balance (less any outstanding loans).
Important Terms
Qualified Federally-Declared Disaster. A “major disaster” declared by the President.
Qualified Individual. An individual who at any time during the incident period has their principal residence in the qualified disaster area, and has sustained an economic loss because of the disaster. The plan may rely on the participant’s reasonable representation that they are a qualified individual, unless it has actual knowledge that that is not the case.
Incident Period. The period declared by FEMA to be the period during which the disaster occurred.
Economic Loss. Generally, any loss due to the disaster, such as loss, damage to, or destruction of real or personal property, displacement from the individual’s home, or loss of livelihood due to temporary or permanent layoffs.
Easier, but not Easy
The SECURE 2.0 changes have eased some of the burdens of offering relief to employees affected by a disaster, but the decision to offer that relief is still not always an easy one. Employers may choose whether, and to what extent, to adopt these disaster relief provisions. They are not mandatory. Employers will need to weigh an interest in helping its employees who are impacted by a disaster, both economically and emotionally, against the administrative burdens these special relief options may place on their plans. Consultation with third-party administrators, recordkeepers, and benefits counsel will help in the decision process.