The IRS recently issued a new fact sheet to answer certain FAQs about the rules in SECURE 2.0 Act of 2022 (the “Act”) that give special rights under certain qualified retirement plans and IRAs to individuals impacted by major disasters that occur or occurred on or after January 26, 2021. The Act was enacted in December 2022 and amended certain sections of the Internal Revenue Code (the “Code”).

These FAQs provide guidance on what the relief consists of, who may claim such relief, and when such relief may be claimed. Relief of this nature has previously been provided on a disaster-by-disaster basis. These amendments make such relief permanent. The FAQs may be found here.

General Rule on Distributions

The Code provides that a taxpayer who receives an amount from a qualified plan will incur a 10% tax penalty on the portion of such amount includible in the individual’s income for the year of receipt. However, in general, this penalty does not apply to certain exempted distributions, including, among other exemptions, distributions made on or after the date the employee turns 59 ½ and certain distributions which are qualified first-time homebuyer distributions.

Qualified Disaster Distributions

The Act amended the Code to add to this list of exemptions from the 10% penalty on early plan distributions any “qualified disaster recovery distribution.” This means the penalty on early distributions does not apply to such distributions.

A “qualified disaster recovery distribution” is any distribution made to a person whose primary residence, during the period of a major disaster, is located in a major disaster area and the person has experienced an economic loss due to the disaster. The distribution must be made during the 180-day period after the later of the first day of the major disaster or the date of the disaster declaration. The FAQ clarify that the plan sponsor/administer may rely on a person’s reasonable representation that the person has experienced such an economic loss and gives examples of economic losses that would qualify.

The maximum distribution for a particular disaster is $22,000. A person generally should include this amount in income on the person’s tax returns in equal installments over a 3-year period starting with the year the distribution is received. The FAQs provide that an individual can instead opt to include the entire distribution in the year of receipt. A plan must report the distribution on a Form 1099-A even if the individual receiving the distribution repays it in the same year as the distribution.

Repayment of Distributions

These distributions generally can be repaid to a plan within the 3-year period beginning on the day after the date the distribution was received. If so repaid, the individual will not owe federal tax on the distribution. However, the FAQs make clear that if a plan does not accept any rollover contributions, it is not required to change its terms to accept such repayments.

Qualified First-Time Homebuyer Distributions

The Act also provides that an individual may repay a qualified first-time homebuyer distribution that the person receives during the 180-day prior to the start of the disaster or the 30-day period after the end of the disaster period and that was not used due to the disaster. The FAQs clarify the individual will not incur federal income tax on the repaid distribution. The repayment must be made during the period beginning on the first day of the disaster and ending 180 days after the later of the first day of the major disaster or the date of the disaster declaration.

Extension of Loan Repayment Timeline and Loan Amount

The Code provides that if a plan participant receives a loan from a qualified plan, the loan will be treated as a distribution unless it is repaid within 5 years and does not exceed a certain maximum amount. The Act amended the Code to increase this maximum amount of the loan if the loan is made during a specified period following a major disaster. An employer may increase the amount up to the full amount of the individual’s vested benefit under the plan, but not more than $100,000 (minus outstanding plan loans of the individual). The Act also extends the timeline that the loan must be repaid if the loan is outstanding during the first day of the disaster period or the date of the disaster declaration.In the case of any loan repayment that is due from the first day of the disaster period to the date that is 180 days after the last day of such period, the due date may be delayed for up to 1 year. Any payments after the suspension period will be adjusted to reflect that delay and any interest accruing during the delay.

Next Steps

An employer may determine whether, and to what extent, to amend its plan to provide for qualified disaster recovery distributions and/or loans and can choose to provide for one but not the other. If an employer does not treat a distribution as a qualified recovery distribution, an individual may still treat the distribution as such on their federal income tax return if such person is qualified to do so.

If an employer opts to implement any of these amendments, they should work with the plan’s recordkeepers and administers to review the feasibility of administering such provisions and they should review related plan documents and communications and to determine what amendments must be made.

Please contact any member of the McLane Middleton Employment Law Practice Group for further guidance on this law.  We will provide further updates on this law as such updates develop.