New Legislation Provides Disaster Tax Relief for Victims of Hurricanes Harvey, Irma, and Maria | Practical Law

New Legislation Provides Disaster Tax Relief for Victims of Hurricanes Harvey, Irma, and Maria | Practical Law

New legislation, the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823), provides disaster tax relief to certain retirement plan participants affected by Hurricanes Harvey, Irma, and Maria. The legislation includes provisions relating to loans, hardship distributions, and plan amendments.

New Legislation Provides Disaster Tax Relief for Victims of Hurricanes Harvey, Irma, and Maria

by Practical Law Employee Benefits & Executive Compensation
Published on 10 Oct 2017 • USA (National/Federal)
New legislation, the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823), provides disaster tax relief to certain retirement plan participants affected by Hurricanes Harvey, Irma, and Maria. The legislation includes provisions relating to loans, hardship distributions, and plan amendments.
On September 29, 2017, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 into law (H.R. 3823). The Act offers relief from certain procedural requirements for loans and hardship distributions from eligible retirement plans for participants affected by Hurricanes Harvey, Irma, and Maria. The Act follows guidance from the IRS, DOL, and Pension Benefit Guaranty Corporation (PBGC) providing similar relief (see, for example, IRS Notice 2017-49 and Announcements 2017-11 and 2017-13).

Qualified Hurricane Distributions and Repayments

Participants in an eligible retirement plan (26 U.S.C. § 402(c)(8)(B)) may treat a distribution as a qualified hurricane distribution. Except with respect to the Act's provision on aggregate limits for qualified hurricane distributions, a "qualified hurricane distribution" is a distribution:
  • Made from an eligible retirement plan:
    • on or after August 23, 2017, and before January 1, 2019 (for Hurricane Harvey);
    • on or after September 4, 2017, and before January 1, 2019 (for Hurricane Irma); or
    • on or after September 16, 2017, and before January 1, 2019 (for Hurricane Maria).
  • Made to an individual:
    • whose principal residence on the relevant date is located in one of the designated disaster areas; and
    • who suffered economic loss as a result of one of the hurricanes.
Under the Act, qualified hurricane distributions are:
  • Not subject to the Internal Revenue Code's (Code) 10% tax on certain early distributions (26 U.S.C. § 72(t)).
  • Limited to $100,000 in the aggregate.
A plan that treats a distribution as a qualified hurricane distribution does not violate the Code provided the amounts treated as qualified hurricane distributions do not exceed the $100,000 limit.
Participants may repay the amount distributed as a qualified hurricane distribution during a three-year period. This period begins on the date the participant receives the distribution. The participant's payments may not exceed the amount originally distributed.
For amounts a participant must include in gross income due to a distribution, the Act provides that the participant includes those amounts on a ratable basis over a three-year period. The participant, however, may decline this option.

Distributions for Home Purchases or Construction

The Act also permits certain participants who received qualified distributions to repay those distributions. A "qualified distribution" is a distribution:
  • Described in Code Sections 72(t)(2)(F), 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(ii), or 403(b)(11)(B) (26 U.S.C. §§ 72(t)(2)(F), 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(ii), or 403(b)(11)(B)).
  • A participant received between February 28, 2017 and September 21, 2017.
  • A participant intended to use to purchase or build a principal residence in one of the disaster areas, but which was not used for that purpose due to one of the hurricanes.
A participant wanting to repay this type of distribution must do so between August 23, 2017 and February 28, 2018. The payments may not exceed the original distribution amount.

Loans from Qualified Plans

Loans from qualified employer plans are not treated as distributions if certain conditions are met, including the requirement that loans to a participant not exceed $50,000 (26 U.S.C. § 72(p)(2); see Practice Note, Qualified Retirement Plan Loans and Qualified Retirement Plan Loans Toolkit). The Act increases the limit for loans to qualified individuals (that is, participants whose principal residences on the relevant dates are located in one of the hurricane disaster areas and who suffer economic loss from a hurricane). Under the Act, the limit for loans from a qualified employer plan increases from $50,000 to $100,000 (see Practice Note, Qualified Retirement Plan Loans: Maximum Loan Amount). This increased limit applies to loans made between September 29, 2017 and December 31, 2018.
For a qualified individual with an outstanding loan on or after the date specified for the relevant hurricane:
  • If the repayment due date falls on or after the date specified for the relevant hurricane and before December 31, 2018, the Act delays that due date for one year.
  • Subsequent repayments are adjusted to reflect the delayed due date and interest that accrues during that delay.
  • The five-year period during which the loan must be repaid in level installments is likewise extended by one year (see 26 U.S.C. § 72(p)(2)(B) and (C)).

Plan Amendments

Plans that do not permit disaster tax relief must be amended by the last day of the first plan year beginning on or after January 1, 2019 to provide that relief. The Act provides that a plan will be treated as operating in accordance with plan terms during the period leading up to the amendment if:
  • The plan is operated as if the amendment were in effect.
  • The plan amendment applies retroactively for that period.
(See Standard Clauses, Plan Language, Hardship Distributions, Hardship Distribution Checklist, and Qualified Retirement Plan Loans Toolkit.)