Disasters can create a sudden need for resources to address the situation at hand. But some resources are more readily accessible than others—resorting to certain kinds of funds can itself create some hardship. 
To help avoid that circumstance and risk having a response to an emergency itself become one, the IRS on May 3 issued a fact sheet that provides information about special rules for distributions from retirement plans and IRAs and for retirement plan loans, for certain individuals affected by federally declared major disasters.
SECURING Responses
Before the enactment of the SECURE 2.0 Act of 2022, there was no disaster relief allowing for distributions from retirement plans and IRAs and for retirement plan loans, for certain individuals affected by federally declared major disasters.
Instead, relief resulted from action Congress would take disaster-by-disaster or year-by-year. But the enactment of the SECURE 2.0 Act of 2022 changed all that.
SECURE 2.0 amended the Internal Revenue Code to provide for special rules for such distributions and loans related to federally declared major disasters that take place on or after Jan. 26, 2021. That’s the date that is 30 days after the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
Special Disaster Relief Rules
Under SECURE 2.0, the general special disaster relief rules for retirement plans and IRAs entail the following:
- expanded distribution options and favorable tax treatment for up to $22,000 of qualified disaster recovery distributions from eligible retirement plans—certain employer-sponsored retirement plans, such as section 401(k) and 403(b) plans, and IRAs—to qualified individuals, as well as special rollover and repayment rules for such distributions.
- relief to repay distributions taken for principal residence purchase/construction.
- an increased limit on the amount a qualified individual may borrow from the an account under an eligible retirement plan (not including an IRA). In addition, an employer also may provide qualified individuals up to an additional year to repay loans taken from a plan.
Qualified Individual
A qualified individual is someone who:
- had their principal residence at any time during the incident period of any qualified disaster in the qualified disaster area; and
- sustained an economic loss because of the qualified disaster.
Qualified Disaster
A qualified disaster is any disaster for which a major disaster has been declared by the President after Dec. 27, 2020. Relief provided under SECURE 2.0 only applies when a major disaster has been declared.
Incident Period
The incident period for a qualified disaster is the period specified by the Federal Emergency Management Agency (FEMA) as that during which the disaster occurred.
Economic Loss
Economic loss for which such distributions or loans could be made include:
- loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or some other cause;
- loss related to displacement from a home; or
- loss of livelihood due to layoffs.
Distributions
A qualified disaster recovery distribution is a distribution made to a qualified individual that comes from an eligible retirement plan on or after the first day of the incident period and before the date that is 180 days after the latest of the following three dates:
- Dec. 29, 2022;
- the first day of the incident period; or
- the date of the disaster declaration.
A qualified disaster recovery distribution cannot exceed an aggregate distribution amount of $22,000 from all of an individual’s plans and IRAs.
Under SECURE 2.0, a qualified disaster recovery distribution is treated as meeting the distribution restrictions for a section 401(k) plan, a money purchase pension plan, a 403(b) plan, or a governmental section 457(b) plan.
However, SECURE 2.0 does not otherwise change when plan distributions may be made from employer-sponsored retirement plans. Further, a pension plan may not make a distribution in a form that is not a qualified joint and survivor annuity without spousal consent just because the distribution could be treated as a qualified disaster recovery distribution.
A qualified distribution taken to buy or build a principal residence in a qualified disaster area means any distribution that is (1) a qualified first-time homebuyer distribution from an IRA or (2) a hardship distribution from a 401(k) or 403(b) plan under certain circumstances.
Loans
SECURE 2.0 permits an additional year for repayment of loans from eligible retirement plans (not including IRAs) and relaxes certain dollar limits on loans.
SECURE 2.0 permits employers to provide up to one year of additional time for qualified individuals to repay certain plan loans if it was outstanding on or after the latest of three dates:
- Dec. 29, 2022,;
- The first day of the incident period with respect to the qualified disaster; or
- The date of the disaster declaration with respect to the qualified disaster.
SECURE 2.0 also permits employers to increase the maximum loan amount available to qualified individuals.
Reasonable Representations
A plan sponsor or plan administrator may rely on a participant’s reasonable representations that the participant qualifies for this special treatment, unless the plan administrator or other person qualified to make the determination has actual knowledge otherwise.
Repayments
In general, a qualified individual may repay all or part of the amount of a qualified disaster recovery distribution to an eligible retirement plan, as long as he or she does so within the 3-year period beginning on the day after the date that the distribution was received. If that person repays the distribution, it will be treated as though it were repaid in a direct trustee-to-trustee transfer so that qualified individual does not owe federal income tax on the distribution.
An individual who received a qualified distribution that was to be used to purchase or construct a principal residence in a qualified disaster area may, within a specified period, repay any or all of the distribution. Under SECURE 2.0, a qualified distribution may be repaid during the period beginning on the first day of the incident period of the qualified disaster and ending on the date that is 180 days after the latest of the following three dates:
- Dec. 29, 2022,
- The first day of the incident period with respect to the qualified disaster, or
- The date of the disaster declaration with respect to the qualified disaster.
The total of any repayment contributions must be no more than the amount of the qualified distribution, and the contributions must be made solely to an eligible retirement plan of which that individual is a beneficiary and to which a rollover contribution of that distribution can be made.
In general, the IRS anticipates that eligible retirement plans will accept a qualified individual’s repayments of a qualified disaster recovery distribution, which are to be treated as rollover contributions.
Taxation and Reporting
A qualified disaster recovery distribution from a retirement plan or IRA is not subject to the 10% additional tax, regardless of how a distribution is reported by the employer on Form 1099-R.
Qualified disaster recovery distributions generally are included in income in equal amounts over a 3-year period, starting with the year in which the distribution is received, unless the individual elects to include the entire distribution in income in the year of receipt.
A qualified individual may designate any eligible distribution as a qualified disaster recovery distribution as long as the total amount designated for a particular qualified disaster does not exceed $22,000.
Employers’ Adoption of the Rules
The expanded distribution and loan rules are optional for employers—they may choose whether, and to what extent, to amend their plan to provide for qualified disaster recovery distributions and/or loans that satisfy the provisions of SECURE 2.0.
However, even if an employer does not treat a distribution as a qualified disaster recovery distribution, an individual may still treat a distribution as such on their federal income tax return if they are a qualified individual and the distribution meets the requirements to be a qualified disaster recovery distribution.
Finding out More
FS-2024-19 is available here: https://www.irs.gov/newsroom/disaster-relief-frequent-asked-questions-retirement-plans-and-iras-under-the-secure-20-act-of-2022
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