Congress passed, and the President finally signed, the Consolidated Appropriations Act, 2021 (“CAA”). This bill, the fifth longest bill to be passed in the history of Congress, contains over seventy new tax policies, extensions, refinements, and other tax-law clarifications. Within its over 5000 pages is The Taxpayer Certainty and Disaster Tax Relief Act (the “TCDT Act”).
The TCDT Act provides that the 10% early withdrawal penalty does not 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.
For normal distributions from a retirement plan prior to age 59 1/2, a 10% early withdrawal penalty generally applies. The TCDT Act provides that this penalty does not 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 TCDT Act, 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. For purposes of the TCDT Act, COVID-19, by itself, does not make an area a “qualified disaster area.”
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 may do so over a three-year period.
In addition to the removal of the penalty for qualified disaster distributions, the TCDT Act also allows individual who received a distribution to purchase or build a home in a qualified disaster area but were 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 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 during within 180 days before the first day of the incident period and ending within 30 days after the expiration of the incident period.
Finally, the TCDT Act increased the amount that a qualified individual make withdraw as a plan loan on account of a disaster. In general, 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 TCDT Act 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 TCDT 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.
As you can see, the CAA includes a great deal of new rules. Many of these rules are a benefit to impacted individuals but can create compliance headaches for plan sponsors. If you have any questions, please contact any of Graydon’s Employee Benefits team.
