New Law Provides Tax Relief to Participants Affected by HurricanesPublications - Client Alert | October 17, 2017
On September 29, 2017 President Donald Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the “Act”), which provides relief to retirement plan participants affected by recent hurricanes. The Act gives participants greater access to their retirement plan money by loosening the restrictions on hardship distributions and plan loans.
The relief under the Act comes in addition to the relief provided by the Internal Revenue Service (the “IRS”) for retirement plan participants affected by recent hurricanes. Unlike the hurricane relief issued by the IRS, however, all employers offering relief under the Act are required to amend their plans.
Relief under the Act is available for plan participants who suffered economic loss and live in declared disaster areas due to Hurricane Harvey, Hurricane Irma, or Hurricane Maria.
Participants may take qualified hurricane withdrawals of up to $100,000. These withdrawals are not subject to the excise taxes that normally apply to early distributions from retirement plans. Additionally, the legislation gives a participant the choice to pay back the distribution within three years without subjecting the distribution to income taxes. The participant may instead choose to keep the distribution and spread out the tax consequences by including the amount of the distribution in gross income evenly over a three year period.
The Act also provides relief for plan loans by allowing a participant to take a loan in an amount equal to the lesser of (1) $100,000 or (2) the full amount of the participant’s vested account under the plan. For loans with upcoming due dates, the Act provides a one-year extension.
Participants who received a hardship distributions in order to purchase a house between February 28, 2017 and September 21, 2017 but were unable to do so on account of the hurricanes can avoid taxation on their distributions if they repay the full amounts of the distributions before March 1, 2018.
Employers are not required to amend their plans before offering relief under the Act, but they are required to amend their plans by the end of the plan year beginning on or after January 1, 2019.
Employers should consider providing relief to their participants under the Act. Employers who decide to provide their employees with this relief will be required to amend their plan documents. Finally, employers should work with their service providers to determine whether their providers have the capacity to offer the hurricane distributions and increased plan loans allowed under the Act.
If you have any questions about the Act, or if you would like assistance with amending your plans to take advantage of this relief, please contact a member of our Employee Benefits Practice Group.