IRS Fact Sheet 2024-19
DISTRIBUTION AND LOAN RULES
On May 3, 2024, the Internal Revenue Service (“IRS”) released Fact Sheet 2024-19, which addresses frequently asked questions about qualified disaster recovery distributions and the related loan rules under the SECURE 2.0 Act of 2022 (“SECURE 2.0”).
Section 331 of SECURE 2.0 includes optional rules for distributions from retirement plans and individual retirement accounts and for retirement plan loans, for certain individuals impacted by federally declared major disasters occurring on or after January 26, 2021. Prior to SECURE 2.0, Congress enacted similar relief for disasters on a case-by-case basis.
The IRS divided the information into four categories: (1) general information, (2) taxation and reporting of qualified disaster recovery distributions, (3) repayment of qualified distributions taken for purchasing or constructing a principal residence in a qualified disaster area, and (4) loans from certain qualified plans. Below is a summary of the information.
This SECURE 2.0 provision has three separate components that can be offered by plans:
- Expanded distribution and tax relief — expands distribution options and provides an exemption from the 10% early withdrawal tax for up to $22,000 of qualified disaster recovery distributions from eligible retirement plans to qualified individuals, which includes special rollover and repayment rules.
- Relief to repay distributions taken for principal residence purchase/construction — allows an individual to repay a first-time homebuyer distribution from an IRA or a hardship withdrawal from a 401(k) or 403(b) plan if the distribution was to be used to purchase or construct a principal residence in a qualified disaster area but was not so used because of the qualified disaster.
- Plan loan relief — increases the limit on the amount a qualified individual may borrow from the individual’s account under an eligible retirement plan (not including an IRA). An employer may also provide qualified individuals up to an additional year to repay plan loans.
Fact Sheet 2024-19 sets out the following definitions:
- Qualified individual — an individual who (1) has a principal residence in the qualified disaster area at any time during the incident period of any qualified disaster, and (2) has sustained an economic loss by reason of the qualified disaster.
- Incident period of a qualified disaster — the period specified by FEMA as the period during which the disaster occurred. This is located on the FEMA website.
- Economic loss by reason of a qualified disaster — includes, without limitation, (1) loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause, (2) loss related to displacement from the individual’s home, or (3) loss of livelihood due to temporary or permanent layoff.
- Qualified disaster — any disaster with respect to which a major disaster has been declared by the President after December 27, 2020. Information about qualified disasters is available on the FEMA website.
- Qualified disaster recovery distribution — a distribution to a qualified individual made from an eligible retirement plan on or after the first day of the incident period of a qualified disaster and before the date that is 180 days after the later of: (1) December 29, 2022, (2) the first day of the incident period, or (3) the date of the disaster declaration. With respect to a particular disaster, a maximum aggregate amount of $22,000 distributed from all plans and IRAs of an individual can be treated as a qualified disaster recovery distribution.
Fact Sheet 2024-19 also provides the following general guidance about these rules:
- It is optional for an employer to amend its plan to provide for qualified disaster recovery distributions and/or the related loan rules. An employer may choose to adopt none, one, or all of the provisions.
- Even if an employer does not treat a distribution as a qualified disaster recovery distribution, an individual may still claim the exemption from the 10% early withdrawal tax by including a form with the individual’s tax return.
- A qualified disaster recovery distribution can be a separate distributable event for a 401(k) plan, money purchase pension plan, 403(b) plan, or governmental 457(b) plan. A defined benefit plan may not make a qualified disaster recovery distribution without a separate distributable event, and a plan with a QJSA requirement cannot make a qualified disaster recovery distribution absent spousal consent.
- An individual may repay all or part of a qualified disaster recovery distribution to an eligible retirement plan within the three-year period beginning on the day after the date the distribution was received. If repaid, the distribution will be treated as if it were repaid as a direct trustee-to-trustee transfer, and the employee can file amended tax returns to claim a refund of amounts previously included in income.
- The IRS anticipates that plans will accept repayments of qualified disaster recovery distributions; however, plans are generally not required to do so if they do not otherwise accept any rollover contributions.
- A plan sponsor or plan administrator is permitted to rely on a participant’s reasonable representation that the participant is a qualified individual who qualifies for a qualified disaster recovery distribution or related loan relief, unless the plan administrator (or other responsible person) has actual knowledge to the contrary.
Taxation and Reporting of Qualified Disaster Recovery Distributions
Fact Sheet 2024-19 provides the following guidance on the taxation and reporting of qualified disaster recovery distributions:
- Regardless of how a distribution is reported by the employer on Form 1099-R, the 10% early withdrawal tax does not apply to any qualified disaster recovery distribution made to a qualified individual. The individual can report a qualified disaster recovery distribution as exempt from the 10% early withdrawal tax using Form 8915-F.
- Qualified disaster recovery distributions generally are included in an individual’s income in equal amounts over a three-year period, starting with the year in which the distribution is received, unless the individual elects to include the entire distribution in income in the year of receipt on individual’s Form 8915-F.
- A plan or IRA must report a qualified disaster recovery distribution on Form 1099-R even if the amount is repaid in the same year.
Repayment of Qualified Distributions for the Purpose of Purchasing or Constructing a Principal Residence in a Qualified Disaster Area
SECURE 2.0 also allows plans to give certain repayment relief to individuals who took a qualified distribution for the purpose of purchasing or constructing a principal residence in a qualified disaster area. For this purpose, a “qualified distribution” is a qualified first-time homebuyer distribution from an IRA or a hardship distribution from a 401(k) or 403(b) plan that:
- Was to be used to construct a principal residence in a qualified disaster area, but was not so used because of the qualified disaster that affected the area, and
- Was received during the period beginning 180 days before the first day of the incident period of that qualified disaster and ending 30 days after the last day of that incident period.
A participant who took such a distribution may repay any or all of the distribution during the period beginning on the first day of the incident period of the qualified disaster and ending on the date that is 180 days after the later of: (1) December 29, 2022, (2) the first day of the incident period, or (3) the date of the disaster declaration.
The repayment may not be more than the amount of the distribution and must be made solely to an eligible retirement plan of which the individual is a beneficiary and to which a rollover contribution can be made. If repaid, the distribution will be treated as if it were repaid in a direct trustee-to-trustee transfer and the qualified individual will not owe federal income tax on the distribution.
Loans from Certain Qualified Plans
SECURE 2.0 also permits plans to give qualified individuals extra time to repay plan loans and to increase loan limits.
If elected by an employer, SECURE 2.0 allows plans to provide up to one year for qualified individuals with respect to a qualified disaster to repay certain plan loans if the loan was outstanding on or after the latest of: (1) December 29, 2022, (2) the first day of the incident period, or (3) the date of the disaster declaration. In the case of any repayment on such a loan that is due from the first day of the incident period to the date that is 180 days after the last day of the incident period, the due date for repayment may be delayed under the plan for up to one year. Any payments after the suspension period must be adjusted to reflect the delay and any interest accruing during the delay.
In addition, SECURE 2.0 permits employers to increase the maximum loan amount available to qualified individuals. If so elected, the limit for plan loans made during a period following a major disaster may be increased up to the lesser of: (1) the full amount of the qualified individual’s vested plan benefit, or (2) $100,000 (minus any other outstanding plan loans).
