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Tax Relief for Hurricane Victims Includes Penalty-Free 401(k) Withdrawals, Easier Access to Loans

Compliance
Article
10/05/2017
  • The new Disaster Tax Relief and Airport and Airway Extension Act provides targeted tax relief for victims of Hurricanes Harvey, Irma, and Maria.
  • The act permits eligible residents affected by the hurricanes to withdraw money from their 401(k) retirement savings accounts without an early withdrawal penalty.
  • It also allows up to $100,000 in loans from 401(k) plans to help individuals cope with the hardships imposed by the hurricanes.

 

New law allows 401(k) withdrawals without penalty

On Oct. 2, 2017, President Trump signed into law the Disaster Tax Relief and Airport and Airway Extension Act, providing an operating budget extension to the Federal Aviation Administration (FAA) and targeted tax relief for victims of Hurricanes Harvey, Irma, and Maria. Effective immediately, the act permits residents affected by the recent natural disasters to withdraw money from their 401(k) retirement savings accounts without paying a penalty, and allows easier access to loan and hardship withdrawals.

The new law aims to provide targeted relief for affected workers as they continue to prepare for retirement, and to address their immediate emergency needs as they rebuild homes and businesses. The act’s benefits are in addition to the tax filing relief that the Internal Revenue Service (IRS) is giving to eligible taxpayers residing or owning businesses in disaster areas designated by the Federal Emergency Management Agency (FEMA) in Florida, Georgia, the Commonwealth of Puerto Rico, the U.S. territories of the Virgin Islands, and parts of Texas.

FEMA-designated disaster areas for Hurricanes Harvey, Irma, and Maria include:

  • Texas: The counties of Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Calhoun, Chambers, Colorado, Dallas, De Witt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, and Wharton.
  • U.S. Virgin Islands: The islands of St. Croix, St. John, and St. Thomas.
  • Puerto Rico: All 78 municipalities of the Commonwealth of Puerto Rico.
  • Florida: All 67 counties.
  • Georgia: All 159 counties.

Distributions from retirement savings plans

The act’s retirement plan distribution and loan tax relief applies to individuals who maintained a principal place of residence in the FEMA-designated hurricane disaster areas on the following dates:

  • Aug. 23, 2017, for Hurricane Harvey;
  • Sept. 4, 2017, for Hurricane Irma; and
  • Sept. 16, 2017, for Hurricane Maria.

 A “qualified hurricane distribution” from a retirement savings plan is eligible for this law’s tax relief if the distribution is made on or after the corresponding hurricane dates listed above and before Jan. 1, 2019. In addition, the law:

  • Waives the 10 percent early withdrawal penalty on all qualified hurricane distributions.
  • Limits the cumulative amount of an individual’s qualified hurricane distributions to $100,000 (less all prior taxable plan-year withdrawals for disaster relief).
  • Permits participants three years to repay their qualified hurricane distributions to the plan.
    • They may choose to delay the 20 percent income tax withholding on qualified hurricane distributions and pay the IRS income tax burden within three tax years.
    • Participants who do not restore their qualified hurricane distributions to the plan (and delayed their 20 percent withholdings) will have three years from the distribution date to pay the IRS this personal income tax burden.
  • Participants who take a qualified hurricane distribution from a retirement plan for a first-time home (to buy or build) in the disaster area and whose transaction was terminated due to one of the hurricanes may recontribute the amount withdrawn to a retirement plan without penalties from Aug. 23, 2017 to Feb. 28, 2018.

Loans

An individual is eligible for loan relief —  a “qualified participant” — if he or she resides or has a business in the FEMA-declared disaster relief areas on the corresponding hurricane dates listed above.

A qualified participant may take out a new 401(k) loan between Oct. 1, 2017 and Dec. 31, 2018, using the increased maximum plan loan limit. The loan limit is the lesser of $100,000 (up from $50,000) or 100 percent of the participant’s vested account balance.

Qualified participants with new or outstanding 401(k) loan balances between Oct. 1, 2017, and Dec. 31, 2018, may defer their loan repayments for up to one year and disregard this one-year period for purposes of loan amortization.

Qualified participants may pay taxes associated with loan defaults over a three-year period, starting with the year of distribution.

Hurricane victims won’t face retirement plan penalties for early withdrawals

The retirement relief provisions in the Disaster Tax Relief and Airport and Airway Extension Act are consistent with the recommendations by the American Retirement Association to save hurricane victims and their families penalties and taxes associated with early withdrawals from retirement savings plans.

Qualified retirement plans have until Dec. 31, 2019, to amend plan documents as directed by the Secretary of Department of Labor for the new law’s provisions.

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Maree P Vahue, MBA, QKA, is a professionally accredited Retirement Services Compliance Analyst II for Paychex, Inc. based in Rochester, NY. Maree and her team are responsible for examining, researching, and communicating ERISA regulations to the Paychex retirement organization that provides recordkeeping for nearly 80,000 clients.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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