On May 3rd, the IRS issued IR-2024-132, which provides general information in the form of frequently asked questions (FAQs), regarding Section 331 of the SECURE Act 2.0. The section establishes permanent rules for governing plan distributions and loans in the event of a federally declared disaster. The implementation of this update relieves Congress of the need to pass special rules for each disaster event. While the agency has yet to issue formal guidance, the FAQs allow the agency an opportunity to quickly provide general information to taxpayers and others. The details contained in the FAQ address several topics including the taxation and reporting of qualified disaster recovery distributions and repayment of qualified distributions. While the information has limited application, the agency confirmed those who rely on the information in good faith will not be subjected to penalties for underpayment of tax. To help clients, prospects, and others, WhippleWood CPAs has summarized the key details below.
Special Disaster Relief Rules
Under the new rules, residents of disaster relief areas now have greater access to plan funds when managing a federally declared disaster. The new benefits include:
- Expanded Relief – Expanded distribution options and favorable treatment is now available to qualified individuals for up to $22,000 of qualified disaster recovery distributions from employer sponsored plans including 401(K), 403(b), and other plan types.
- Plan Loan Relief – There is now an increased limit on the amount a qualified individual can borrow from a retirement plan account. Employers have the option but are not required, to provide an additional year for loan repayment.
- First–Time Homebuyer Distribution—Participants can repay a first-time homebuyer distribution or hardship withdrawal from a 401(k) or 403(b) if the money was used to purchase/construct a principal residence in a qualified disaster area but was not used because of the disaster.
A qualified individual is one whose principal residence is deemed to be located within the disaster zone and has sustained economic loss due to the event. This can include loss, damage, or destruction of personal property related to fire or flood, loss due to displacement from the home, and loss of livelihood due to layoffs. Plan sponsors can rely on a participant’s representation that they are eligible for the special treatment.
It is important to note that a qualified disaster recovery distribution is made to a qualified individual from an eligible retirement plan. The distribution must be issued on or after the first day of the incident and before 180 days after the latest of the following: December 29, 2022, the first day of the incident period, or the date of the formal disaster declaration. The FAQs also clarify that a maximum aggregate of $22,000 can be classified as this type of distribution.
For those interested in repayment, it is permitted, assuming it is completed within three years beginning on the date after receipt. There will be no federal income tax due on the amount.
Distribution Tax/Reporting Rules
The FAQs also provide details about the taxation and reporting of distributions. First, it is confirmed the 10% additional tax on early distributions will not apply. The reporting of the distributions as income can be included in equal amounts over three years starting in the year received. Reporting the distribution is as easy as including the amount on the taxpayer’s federal income tax return. Finally, plans must report the distribution on Form 1099-R and it is required whether the distribution is repaid within the same year or not.
Contact Us
Qualified disaster recovery distributions can provide needed capital when the unexpected occurs. The information in the FAQs provides participants and sponsors with a much-needed summary of the rules governing this update. If you have questions about the information outlined above or need assistance with another tax or accounting issue, WhippleWood CPAs can help. For additional information, call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.