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House Approves Retirement Plan Tax Relief for California Wildfire Victims

As part of its year-end legislative push, the U.S. House of Representatives approved legislation on Dec. 21 extending to victims of the California wildfires access to their 401(k)s and similar plans without incurring IRS penalties or immediate tax liability.

This new, proposed tax relief for the wildfire victims was approved as part of an $81 billion supplemental disaster relief package (H.R. 4667). The House approved H.R. 4667 by a vote of 251-169, with the support of 69 Democrats. Overall, the legislation is intended to help communities in Texas, Florida, Puerto Rico and California rebuild after experiencing devastating losses from the recent natural disasters.

The Senate did not consider the legislation before adjourning for the year.

In general, the legislation provides relief from the 10% early withdrawal penalty for qualified distributions up to $100,000 made on or after Oct. 8, 2017, and before Jan. 1, 2019. Distributions must be made by an individual whose principal place of residence was in a wildfire disaster area and who sustained an economic loss due to the wildfires.

In addition, distributions can be included in income ratably over a three-year period beginning with the year of distribution, unless the individual elects not to have ratable inclusion apply. Alternatively, amounts that are recontributed within the three-year period would be treated as a rollover and not includible in income.

The legislation would:

  • permit individuals to recontribute funds to retirement plans if the funds were distributed for a home purchase in a wildfire disaster area that was cancelled on account of the wildfires, and

  • increase the limit and extends the repayment deadline for loans from retirement plans.

The bill also includes tax provisions relating to employment-retention tax credits for employers affected by the wildfires, temporary suspension of limitations for charitable contributions, special rules for qualified disaster-related personal casualty losses, and income requirements for the earned income tax credit and the child tax credit.

The retirement tax relief provided in the disaster tax relief legislation approved in September 2017 – The Disaster Tax Relief and Airway Extension Act of 2017 (P.L. 115-63/H.R. 3823) – applied only to victims of Hurricanes Harvey, Irma and Maria, necessitating a need to extend the assistance to the wildfire victims.

The IRS had previously provided limited relief to victims of Hurricanes Harvey, Irma and Maria and the California wildfires, permitting easier access to funds held in workplace retirement plans and in IRAs as well as easing some deadlines and requirements relevant to retirement plans for certain victims of the wildfires.