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Bipartisan Disaster Retirement Savings Act Introduced

Legislation

Legislation supported by the American Retirement Association that would make permanent retirement plan tax relief measures following a presidentially declared disaster was introduced Dec. 9. 

The bipartisan Disaster Retirement Savings Act, introduced by Reps. Mike Thompson (D-CA) and Mike Kelly (R-PA), who both sit on the tax-writing House Ways and Means Committee, would help survivors of natural disasters by allowing them to withdraw funds from retirement accounts to cover the unexpected and emergency costs related to disasters without incurring fees or penalties. 

The tax relief would be triggered automatically if the president issues a federal disaster declaration. 

“Survivors of natural disaster deserve to know that the Federal government is working to help them respond and recover from the moment the emergency begins. That’s why I am proud to introduce this important bipartisan legislation that allows people in disaster zones to withdraw funds from their retirement accounts without penalties or fees to cover emergency expenses such as temporary housing,” Thompson said in a statement.  

“Americans should not be penalized for withdrawing their hard-earned retirement money to cover emergency costs stemming from a natural disaster,” added Kelly. “This bill will provide the resources and the peace of mind for people in a moment when they really need it.”

Under current law, taxpayers impacted by natural disasters may be subject to 20% withholding and 10% in early withdrawal tax penalties if they draw from their retirement funds to cover emergency disaster costs. Congress often acts afterwards to provide relief, but it’s not always immediately and is not a certainty. 

The Disaster Retirement Savings Act of 2021 tracks very closely with retirement plan disaster-relief provided in earlier years in earlier legislation. In general, the bill includes relief from the 10% early withdrawal penalty for qualified disaster relief distributions up to $100,000 from a qualified retirement plan, 403(b) plan, 457(b) plan or an IRA. 

In addition, income attributable to a qualified disaster distribution may be included in income ratably over three years, and the amount of a qualified disaster distribution may be recontributed to an eligible retirement plan within three years.

A “qualified disaster distribution” is defined as any distribution from a qualified retirement plan, 403(b) or 457(b) plan made on or after the first day of the incident period of a qualified disaster and before 180 days after the applicable period, to an individual whose principal place of residence during the incident period is located in the disaster area and who has sustained an economic loss by reason of such disaster.

Additionally, a plan would not be treated as violating any Code requirement merely because it treats a distribution as a qualified disaster distribution, provided that the aggregate amount of such distributions from plans maintained by the employer and members of the employer’s controlled group or affiliated service group does not exceed $100,000 for each qualified disaster.

The legislation also allows for the recontribution of retirement plan withdrawals for home purchases cancelled due to eligible disasters. Additionally, it allows an increase in the limit on loans from $50,000 to $100,000 that would not be treated as distributions. And individuals with outstanding loans who reside in a disaster area would be eligible to delay repayment of their loans for up to one year.  

The bill was referred to the House Ways and Means Committee. 

Companion legislation was introduced earlier this year by Sens. Bill Cassidy (R-LA) and Bob Menendez (D-NJ), both of whom sit on the Senate Finance Committee. This bill was also endorsed by the ARA.