Disaster Relief Act Relaxes Retirement Plan Rules for Hurricane Victims

On September 29, 2017, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the “Act”). Similar to the relief provided following Hurricane Katrina, the Act allows participants affected by recent hurricanes to have greater access to retirement funds.

Individuals Eligible for Relief. Plan participants may take advantage of the relaxed rules if: (i) they had a principal place of abode in a federally declared disaster area due to Hurricane Harvey, Hurricane Irma, or Hurricane Maria; and (ii) they sustained economic loss as a result of the disaster.

Types of Relief

Tax-Favored Withdrawals. For “qualified hurricane distributions” of up to $100,000 made between August 23, 2017, and December 31, 2018, the Act:
- Eliminates the 10% “early distribution” penalty;
- Exempts distributions from the 20% mandatory Federal tax withholding that normally applies to distributions (other than hardship distributions) that are paid directly to participants;
- Allows participants to avoid taxation by repaying distributions within 3 years; and
- Allows participants to elect to spread over 3 years the inclusion of income from distributions.
Withdrawal Restrictions Eased. Plan sponsors may (but are not required to) allow qualified individuals who are actively employed to take qualified hurricane distributions (subject to the $100,000 limit) from 401(k), 403(b) and 457(b) plans without regard to the normal rules that otherwise may prohibit such in-service distributions. Although a qualified individual must have sustained an economic loss as a result of a hurricane, the normal requirements for hardship distributions – including the requirements that the distribution be based on need and not exceed the amount of the hardship – do not apply to qualified hurricane distributions.
Repayment of Hardship Withdrawals for Certain Home Purchases. Participants who received a hardship distribution for a home purchase or home construction in a disaster area between March 1, 2017, and September 20, 2017, but who were unable to purchase or build because of Hurricane Harvey, Hurricane Irma or Hurricane Maria, may avoid taxation by repaying the amount of the distribution to a qualified plan or an IRA prior to March 1, 2018.
Increased Loan Amounts and Delayed Repayment. For loans to qualified individuals made between September 29, 2017, and January 1, 2019, the Act allows plan sponsors to amend their plans to:
- Increase the maximum loan amount from $50,000 to $100,000; and
- Allow participants to take the full amount of their vested benefit as a loan, rather than limiting the loan amount to 50% of their vested balance.

The Act also allows plan sponsors to amend their plans (i) to delay the due date for loan repayments for qualified individuals for 1 year, and (ii) extend the maximum repayment period accordingly.

Relief is Voluntary for Plan Sponsors. The provisions of the Act that affect plan administration, including whether the plan will allow qualified hurricane distributions or increase loan amounts, are voluntary on the part of plan sponsors. Before deciding whether to implement any of the provisions, sponsors should consider the impact on plan administration including the ability of the plan sponsor’s payroll system and the plan’s recordkeeper to implement the changes.

Extended Amendment Deadline. Plan sponsors may begin operating their plans in accordance with the Act immediately. Plan sponsors will have until the last day of the plan year ending on or after January 1, 2019, to amend their plans for these charges.

Contact Information. For more information, please contact Don Mazursky (404.888.8840), David Putnal (404.888.8836), Toby Walls (404.888.8870), Teri King (404.888.8847), or Chandra Burns (404.888.8834).