The Consolidated Appropriations Act, 2021 signed into law by President Trump, also provided relief to distributions from a retirement plan as a result of a declared disaster.
The Act provides that the 10% early withdrawal penalty doesn’t apply to qualified disaster distributions; that special rules apply to retirement plan distributions used for qualified disaster area home purchases; and for increases in the limit for retirement plan loans made because of a disaster.
The Act provides that the pre-59 ½ early 10% distribution penalty doesn’t apply to any qualified disaster distribution. A “qualified disaster distribution” is any distribution made from an eligible retirement plan: (i) on or after the first day of the incident period of a qualified disaster and before the date which is 180 days after the date of the enactment of the, and (ii) to an individual whose principal place of residence was located in the qualified disaster area and who sustained an economic loss by reason of such qualified disaster. An individual may not receive a qualified disaster distribution that exceeds the excess of $100,000 over the aggregate amounts treated as qualified disaster distributions received by such individual for all prior tax years. If an individual has to include any part of the distribution in income, they can spread it over a three-year period.
The Act also allows an individual who received a distribution to purchase or build a home in a qualified disaster area but was unable to do so, to repay the distribution to an eligible retirement plan. The eligible retirement plan can be a plan for which the individual is a beneficiary and to which a rollover contribution of such distribution could be made. This also includes IRAs. For the special repayment rule to apply, a “qualified distribution” means any distribution which was to be used to purchase or build a home in a qualified disaster area, but which was not used because of the qualified disaster. The distribution must have been received within 180 days before the first day of the incident period and ending within 30 days after the expiration of the incident period.
The Act also increased the amount that a qualified individual can withdraw as a plan loan on account of a disaster. A loan from a retirement plan is limited to the lesser of $50, 0000 or 50% of the participant’s vested account balance in the plan. The TAct increased the maximum amount to the lesser of $100,000 or 100% of the participant’s vested account balance. For purposes of this new rule, a “qualified individual” is an individual whose principal residence was located in the qualified disaster area who sustained an economic loss by reason of such qualified disaster.
In addition, the Act permits qualified individuals to delay the repayment of loans, including previously made loans, for one year if the payment due date occurs during the period beginning on the first day of the incident period and ending on the date which is 180 days after the last day of the period. Any subsequent repayments will be adjusted to reflect the delay and any interest that accrued during the delay.