Financial Intel Monthly

Special Hurricane and Other Natural Disaster Distribution Provisions

Nov 23, 2020 12:19:00 PM / by The Retirement Group (800) 900-5867

tornado screengrab

 

Signed into law on September 23, 2005, the Katrina Emergency Tax Relief Act of 2005 contained tax provisions intended to offer relief to individuals and businesses affected by Hurricane Katrina. These provisions included several temporary changes to IRA and employer-sponsored retirement plan distribution rules. The Gulf Opportunity (GO) Zone Act of 2005 , signed into law on December 21, 2005, extended these provisions to individuals and businesses impacted by Hurricanes Rita and Wilma. The Food, Conservation, and Energy Act of 2008 (otherwise known as the Farm bill) extended the relief provided by the GO Zone Act to individuals and businesses impacted by the May 4, 2007 storms and tornados in the Kansas disaster area.

The Emergency Economic Stabilization Act of 2008 further extended the relief provided by the GO Zone Act to individuals and businesses impacted by the 2008 tornados, storms, and flooding in the Midwestern disaster area. Specifically, these three Acts exempt qualified distributions (for victims of hurricanes Katrina, Rita, and Wilma) and qualified Recovery Assistance distributions (for victims of the Kansas and Midwestern storms) from the additional 10 percent premature distribution penalty tax, and allow individuals to spread the resulting income over a three-year period. Individuals can also recontribute qualified distributions within three years. Recontributions are also allowed for individuals who took retirement plan distributions to purchase a home in the hurricane disaster areas. In addition, plan loan limits are increased for qualifying individuals.

Tip: In Announcement 2012-44, the IRS announced special rules for loans and hardship distributions from 401(k), 403(b), and 457(b) plans to certain victims of Hurricane Sandy and members of their families. In general, this relief expired on February 1, 2013.

Qualified Hurricane Distributions and Qualified Recovery Assistance Distributions

What Is a Qualified Hurricane Distribution?

To be considered a qualified hurricane distribution, a distribution must be made from a qualified retirement plan (including a 401(k) plan), a 403(b) plan, a governmental 457 plan, or an individual retirement arrangement (IRA). In addition:

  • The distribution must be made on or after August 25, 2005 and before January 1, 2007, to an individual (1) whose principal place of abode on August 28, 2005 was located in the Hurricane Katrina disaster area, and (2) who sustained economic loss as a result of Hurricane Katrina;
  • The distribution must be made on or after September 23, 2005 and before January 1, 2007, to an individual (1) whose principal place of abode on September 23, 2005 was located in the Hurricane Rita disaster area, and (2) who sustained economic loss as a result of Hurricane Rita; or
  • The distribution must be made on or after October 23, 2005 and before January 1, 2007, to an individual (1) whose principal place of abode on October 23, 2005 was located in the Hurricane Wilma disaster area, and (2) who sustained economic loss as a result of Hurricane Wilma.

Caution: Total qualified hurricane distributions are limited to $100,000 per individual. This limit represents the total amount of qualified hurricane distributions that an individual can receive during his or her lifetime from all retirement plans and IRAs.

Tip: A qualified hurricane distribution may be paid from a 401(k) plan, 403(b) plan, or governmental 457 plan regardless of whether an employee would otherwise be eligible for a distribution under the plan.

Caution: Retirement plans don't have to allow qualified hurricane distributions. Even so, if an individual otherwise qualifies for, and receives, any distribution from an employer retirement plan, and the distribution meets the requirements described above, he or she can treat the payment as a qualified hurricane distribution.

What Is a Qualified Recovery Assistance Distribution?

To be considered a qualified Recovery Assistance distribution, a distribution must be made from a qualified retirement plan (including a 401(k) plan), a 403(b) plan, a governmental 457 plan, or an individual retirement arrangement (IRA). In addition, the distribution must be made:

  • on or after May 4, 2007 and before January 1, 2009 to an individual (1) whose principal place of abode on May 4, 2007 was located in the Kansas disaster area, and (2) who sustained economic loss as a result of the Kansas tornados
  • on or after the "applicable disaster date (from May 2, 2008 to June 5, 2008, depending on the particular state) and before January 1, 2010 to an individual (1) whose principal place of abode on the applicable disaster date was located in the Midwestern disaster area, and (2) who sustained economic loss as a result of the Midwestern storms, tornados and flooding

Caution: Total qualified Recovery Assistance distributions are limited to $100,000 per individual. This limit represents the total amount of qualified Recovery Assistance distributions that an individual can receive during his or her lifetime from all retirement plans and IRAs.

Tip: A qualified Recovery Assistance distribution may be paid from a 401(k) plan, 403(b) plan, or governmental 457 plan regardless of whether an employee would otherwise be eligible for a distribution under the plan.

Caution: Retirement plans don't have to allow qualified Recovery Assistance distributions. Even so, if an individual otherwise qualifies for, and receives, any distribution from an employer retirement plan, and the distribution meets the requirements described above, he or she can treat the payment as a qualified Recovery Assistance distribution.

New Exception to The Additional 10 Percent Premature Distribution Penalty Tax

Qualified hurricane distributions and qualified Recovery Assistance distributions from qualified plans, 403(b) plans, and IRAs will not be subject to the additional 10 percent premature distribution penalty tax . In addition, no mandatory withholding requirements will apply.

Caution: Qualified hurricane distributions and qualified Recovery Assistance distributions are not subject to the additional 10 percent premature distribution penalty tax, but they are subject to ordinary income tax unless recontributed within three years. Resulting income (and income tax), however, can be spread out over a three-year period (discussed below).

Caution: Total distributions from retirement plans and IRAs that exceed the $100,000 limit will not be considered qualified hurricane or Recovery Assistance distributions, and will be subject to the additional 10 percent premature distribution penalty tax unless another exception applies.

Caution: This provision has expired for individuals impacted by Hurricanes Katrina, Rita, and Wilma, and individuals in the Midwestern and Kansas disaster areas.

Resulting Income Can Be Spread Over Three Years

Individuals who take a qualified hurricane distribution or a qualified Recovery Assistance distribution can spread the resulting income ratably over the three-year period beginning with the year of distribution.

Tip: Because the resulting income is actually averaged over the three-year period, there's a substantial likelihood that the total amount of tax that results from the distribution will be reduced.

Tip: An individual can elect not to spread income resulting from a qualified hurricane or Recovery Assistance distribution over the three-year period. In that case, the resulting income would be reported for the year received, unless some or all of the qualified distribution is recontributed (as discussed below).

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The amount that an individual must include in income for any single year in the three-year period cannot exceed the total amount that must be included in income as a result of the qualified hurricane or Recovery Assistance distribution, reduced by any amounts already included in income. This means that recontributing part of a qualified hurricane or Recovery Assistance distribution will reduce any outstanding amount that needs to be included in income.

Example(s): John, who takes a qualified Recovery Assistance distribution in 2008 of $90,000, can spread the resulting income evenly over a three-year period ($30,000 in 2008, $30,000 in 2009, and $30,000 in 2010). John includes and pays taxes on $30,000 for 2008, and $30,000 for 2009. In 2010, John recontributes $20,000 of the distribution. The $20,000 recontribution reduces the total amount that must be included in income as a result of the distribution to $70,000 ($90,000 distribution less the $20,000 recontribution). Because John has already included $60,000 in income ($30,000 for 2008 and $30,000 for 2009), John will only include $10,000 in income for 2010 as a result of the qualified Recovery Assistance distribution.

Caution: This provision has expired for individuals impacted by Hurricanes Katrina, Rita, and Wilma, and individuals in the Kansas and Midwestern disaster areas.

Distributions Can Be Recontributed Within Three Years

Individuals who take qualified hurricane distributions or qualified Recovery Assistance distributions may recontribute those distributions to an eligible retirement plan or IRA within three years. Any amount recontributed will be treated as a rollover for tax purposes. The amount recontributed will therefore not be includible in income.

Caution: The three-year period begins the day after the date the distribution is received.

Tip: Individuals who report and pay federal income tax on distributions that are subsequently recontributed can file amended returns to claim refunds of the tax attributable to the recontributed amounts.

Tip: Funds that are recontributed do not have to be recontributed to the IRA or plan from which the distribution was made.

Caution: This provision has expired for individuals impacted by Hurricanes Katrina, Rita, and Wilma, and individuals in the Kansas and Midwestern disaster areas.

Limited Opportunity to Recontribute Funds Withdrawn for Home Purchase

Generally, eligible rollover distributions from qualified retirement plans, 403(b) plans, and IRAs can be rolled over within 60 days to another plan, annuity, or IRA. Amounts not rolled over within this 60-day window are includible in income, and individuals under age 59½ may be subject to the additional 10 percent premature distribution penalty tax (unless an exception applies). In addition, "hardship" distributions (which can include distributions relating to the purchase of a principal residence) from qualified retirement plans such as 401(k) plans and 403(b) annuities are not eligible to be rolled over.

The Katrina Emergency Tax Relief Act of 2005 and The Gulf Opportunity (GO) Zone Act of 2005, however, provided that individuals who took qualified distributions from 401(k) plans, 403(b) plans, or IRAs to purchase a home in the hurricane disaster areas could recontribute all or part of their distributions to a retirement plan, 403(b) annuity, or an IRA through February 28, 2006.

The Food, Conservation, and Energy Act of 2008 provided that individuals who took qualified distributions from 401(k) plans, 403(b) plans, or IRAs to purchase a home in the Kansas disaster area could recontribute all or part of their distributions to a retirement plan, 403(b) annuity, or an IRA through October 22, 2008. Similarly, the Emergency Economic Stabilization Act of 2008 provides that individuals who take qualified distributions from 401(k) plans, 403(b) plans, or IRAs to purchase a home in the Midwestern disaster area can recontribute all or part of their distributions to a retirement plan, 403(b) annuity, or an IRA through March 3, 2009. Any amount recontributed is treated as a rollover, and is not includible in income (and is also not subject to the additional 10 percent premature distribution penalty tax).

To qualify, a distribution must be a hardship distribution from a 401(k) plan or 403(b) plan, or a qualified first-time homebuyer distribution from an IRA, that would have been used to purchase or construct a home in the applicable disaster area, but was not so used as a result of that disaster.

Caution: This provision has expired for individuals impacted by Hurricanes Katrina, Rita, and Wilma, and individuals in the Kansas and Midwestern disaster areas.

Special Plan Loan Provisions Established

In general, a loan from an employer-sponsored retirement plan to a plan participant is not treated as a taxable distribution of plan benefits provided the loan does not exceed the lesser of (1) $50,000, or (2) the greater of $10,000 or one half of the participant's vested accrued benefit under the plan.

Under the Katrina Emergency Tax Relief Act of 2005 and The Gulf Opportunity (GO) Zone Act of 2005, however, special qualified employer plan loan rules applied to loans made to qualified individuals impacted by Hurricane Katrina, Rita, or Wilma. For qualified plan loans made to these individuals prior to January 1, 2007, the maximum amount of the loan was increased to the lesser of (1) $100,000, or (2) the greater of $10,000 or 100 percent of the participant's vested accrued benefit under the plan. Under The Food, Conservation, and Energy Act of 2008, special qualified employer plan loan rules applied to loans made to qualified individuals affected by the Kansas tornados. For qualified plan loans made to these individuals prior to January 1, 2009, the maximum amount of the loan was increased to the lesser of (1) $100,000, or (2) the greater of $10,000 or 100 percent of the participant's vested accrued benefit under the plan.

Similarly, under the Emergency Economic Stabilization Act of 2008, special qualified employer plan loan rules apply to loans made to qualified individuals affected by the Midwestern storms. For qualified plan loans made to these individuals during the period beginning October 3, 2008, and ending December 31, 2009, the maximum amount of the loan is increased to the lesser of (1) $100,000, or (2) the greater of $10,000 or 100 percent of the participant's vested accrued benefit under the plan. Qualified individuals are individuals who:

  • On August 28, 2005, had a principal place of abode in the Hurricane Katrina disaster area, and sustained economic loss as a result of Hurricane Katrina
  • On September 23, 2005, had a principal place of abode in the Hurricane Rita disaster area, and sustained economic loss as a result of Hurricane Rita
  • On October 23, 2005, had a principal place of abode in the Hurricane Wilma disaster area, and sustained economic loss as a result of Hurricane Wilma
  • On May 4, 2007, had a principal place of abode in the Kansas Presidential Disaster Area, and sustained economic loss as a result of the Kansas tornados Additionally, qualified individuals with outstanding qualified employer plan loans on or after August 25, 2005, for Hurricane Katrina (September 23, 2005 for Hurricane Rita, October 23, 2005 for Hurricane Wilma) were able to delay repayments due through December 31, 2006 for one year. Qualified individuals in the Kansas disaster area with outstanding qualified employer plan loans on or after May 4, 2007, were able to delay repayments due through December 31, 2008 for one year. Qualified individuals in the by Midwestern disaster area with outstanding qualified employer plan loans on or after the applicable disaster date are able to delay repayments due through December 31, 2009 for one year.

Tip: Any subsequent repayments must be re-amortized to reflect the delay in the due date and any interest accruing during such delay.

Caution: The increased loan limit and repayment extension apply to qualified retirement plans under IRC Section 401(a), qualified annuity plans under Section 403(a), Section 403(b) plans, and governmental Section 457(b) plans.

Caution: An employer-sponsored retirement plan does not have to provide increased loan limits to qualified individuals.

Caution: This provision has expired for individuals affected by Hurricanes Katrina, Rita, and Wilma, and individuals in the Kansas and Midwestern disaster areas.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

 

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

 

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