The American Retirement Association is urging Congress to approve legislation providing victims of Hurricanes Harvey, Irma and Maria access to their 401(k) and similar plan savings without incurring IRS penalties and taxes.
The ARA has been making the case that legislation should mirror the relief Congress provided in 2005 to victims of Hurricanes Katrina, Wilma and Rita.
While the IRS has provided limited administrative relief to those affected by Hurricane Harvey and Hurricane Irma, the agency does not have authority to ease penalties and taxes that could be imposed on certain hardship distributions and other withdrawals from retirement plans and IRAs by disaster victims and their families.
Based on the tragic circumstances and losses suffered by the victims of Hurricanes Harvey, Irma and Maria, the ARA believes the penalty and tax relief is justified and warranted, as individuals and families struggle to rebuild their homes and lives.
In particular, the ARA is asking Congress to approve legislation as soon as possible that extends the following relief to the current hurricane victims, as it did in 2005:
- Waive the 10% penalty on early withdrawals from retirement plans for individuals who have a principal residence in the disaster relief areas and suffered economic loss. Permit individuals 3 years to repay the distribution. Allow individuals unable to repay the distribution to pay the tax ratably over 3 years.
- Permit 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home purchase in the disaster area and whose transaction was terminated due to the hurricane to recontribute the amount withdrawn to a plan or IRA without penalties.
- Increase retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan (basically doubling current loan limits).
- Extend retirement plan loan repayment periods to purchase or repair homes damaged in the hurricane relief area.
- Allow individuals unable to repay loans to pay the income tax associated with a loan default over 3 years rather than all in the year of default.
- Permit individuals who borrowed from their plan and have a repayment due during the months following the hurricane to delay their loan repayment up to one year.
The ARA notes that the legislative proposal would simply involve adding Hurricane Harvey, Irma, and Maria as an additional qualifying event to Internal Revenue Code Section 1400Q.