Legislation to Expand Hurricane Relief Emerges
Congress has released draft legislation consistent with recent recommendations by the American Retirement Association to expand access by victims of Hurricanes Harvey, Irma and Maria to their 401(k) and similar plans without incurring IRS penalties and taxes.
The draft legislation, currently named the “Disaster Tax Relief and Airway Extension Act of 2017,” mirrors the retirement plan savings relief previously provided by Congress to victims of Hurricanes Katrina, Wilma and Rita in 2005. In addition, the legislation includes other tax-related provisions to provide relief.
By way of background, the IRS recently provided limited administrative relief to victims of Hurricanes Harvey and Irma, but the relief is limited to that within the ability of the IRS to grant: easing the rules for taking hardship distributions and loans from retirement plans.
As these hard-hit communities struggle to rebuild, the ARA Government Affairs Committee has been encouraging Members of Congress to pass relief as soon as possible. House Ways and Means Committee Chairman Kevin Brady (R-TX) plans to introduce the legislation Sept. 25.
As currently drafted, the relief would apply to individuals who maintain a principal place of residence in the following hurricane disaster declaration areas on the corresponding dates:
- Hurricane Harvey: Aug. 23, 2017
- Hurricane Irma: Sept. 4, 2017
- Hurricane Maria: Sept. 16, 2017
The retirement-related provisions of the legislation would provide the following relief:
- The 10% penalty on early withdrawals from retirement plans for individuals who have a principal residence in the disaster relief area and suffered economic loss would be waived. The aggregate amount of distributions received by any individual is limited to $100,000, less prior withdrawals for disaster relief. Individuals would be permitted three years to repay the distribution, and those who do not restore that distribution would be permitted to pay the resulting tax burden ratably over three years.
- Individuals who took a hardship distribution from a plan or withdrawal from an IRA for a first-time home purchase in the disaster area and whose transaction was terminated due to the hurricane would be permitted to recontribute the amount withdrawn to a plan or IRA without penalties.
- Retirement plan loan limits would be increased to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan (basically doubling current loan limits).
- Retirement plan loan repayment periods would be extended to purchase or repair homes damaged in the hurricane relief area.
- Individuals unable to repay loans could pay the income tax associated with a loan default over three years rather than the full amount in the year of default.
- Individuals who previously borrowed from their plan and have a repayment due during the months following the hurricane could delay their loan repayment up to one year.
The bill is expected to be considered by the full House this week under suspension of the rules. Other provisions in the bill (FAA-related policies, taxes, and Airport and Airway Trust Fund expenditure authorities) are currently scheduled to expire on Sept. 30, 2017, providing a bit of timing impetus. Additional hurricane-related tax provisions are expected to be advanced separately over the coming months, once the extent of the damage and the needs of affected communities can be more fully assessed.