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Grassley Bill Addresses Use of Retirement Funds Related to Disasters

Legislation introduced Feb. 28 by Sen. Charles Grassley (R-IA) includes provisions that concern the use of funds from retirement plans to address losses and circumstances facing account holders after disasters take place.

The use of retirement plan funds is really one area the bill, The Tax Extender and Disaster Relief Act (S. 617), addresses. The measure seeks to extend a variety of expiring provisions, some of which expired in 2018 and others of which will do so this year. It also addresses tax relief related to disaster recovery.

Among the provisions which address how tax law and regulations are applied when disasters take place are provisions concerning the tax treatment of use of retirement plan funds. The bill provides that:

  • Code Section 72(t) shall not apply to any qualified disaster distributions.
  • The aggregate amount of distributions received by an individual which may be treated as qualified disaster distributions for any taxable year shall not exceed the excess of $100,000, over the aggregate amounts treated as qualified disaster distributions received by such individual for all prior taxable years.
  • If a distribution to an individual is a qualified disaster distribution, a plan shall not be treated as violating the Internal Revenue Code just because the plan treats the distribution that way — unless the aggregate amount of such distributions from all plans maintained by the employer and any member of any controlled group which includes the employer to such an individual exceeds $100,000.

Income Inclusion

The provisions concerning taxation of disaster-related distribution of retirement plan funds state that unless the taxpayer elects otherwise, any amount required to be included in gross income for such taxable year shall be included ratably over the three-taxable-year period beginning with such taxable year. They also provide that qualified disaster distributions shall not be treated as eligible rollover distributions for purposes of Code Sections 401(a)(31), 402(f), and 3405; however, they shall be treated as meeting the plan distribution requirements of Code Sections 401(k)(2)(B)(i), 403(b)(7)(A)(ii), 403(b)(11), and 457(d)(1)(A).

Recontributions of Withdrawals for Home Purchases

The bill provides that beginning on the first day of the period of the qualified disaster and ending 180 days after the date S. 617 is enacted, any individual who received a qualified distribution may make one or more contributions  — but they must be in an aggregate amount: (1) that does not exceed a qualified distribution to an eligible retirement plan of which the individual is a beneficiary; and (2) to which a rollover contribution of such a distribution could be made under Sections 402(c), 403(a)(4), 403(b)(8), or 408(d)(3).

Repayments

S. 617 provides that any individual who receives a qualified disaster distribution may, at any time during the three-year period beginning on the day after the date on which such distribution was received, make one or more contributions — but they must be in an aggregate amount not to exceed the amount of such a distribution to an eligible retirement plan of which the individual is a beneficiary and to which a rollover contribution of such a distribution could be made.

If an individual makes a contribution concerning a qualified disaster distribution from an eligible retirement plan other than an IRA, then he or she shall be treated as having received the qualified disaster distribution in an eligible rollover distribution and as having transferred the amount to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution.

If a contribution is made concerning a qualified disaster distribution from IRA, the qualified disaster distribution shall be treated as a distribution described in Code Section 408(d)(3) and as having been transferred to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution.

Loans

The legislation provides that for any loan from a qualified employer plan to a qualified individual made during the 180-day period beginning on the date of the enactment of S. 617:

  • clause (i) of Section 72(p)(2)(A) shall be applied by substituting “$100,000” for “$50,000”; and
  • clause (ii) shall be applied by substituting “the present value of the nonforfeitable accrued benefit of the employee under the plan” for “one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan.”

In addition, for a qualified individual with an outstanding loan from a qualified employer plan on or after the first day of the incident period of the qualified disaster:

  • if the repayment due date occurs during the period beginning on the first day of the incident period and ending on the date 180 days after the last day of the incident period, the due date shall be delayed for one year;
  • any subsequent repayments regarding any such loan shall be appropriately adjusted to reflect the delay in the due date and any interest that accrues during the delay; and
  • in determining the five-year period and the term of a loan, the period beginning on the first day of the incident period and ending on the date 180 days after the last day of the incident period shall be disregarded.

Bill Status

S. 617 is on the Senate’s legislative calendar, but has not been referred to a committee nor voted upon.