IRS FAQs Address SECURE 2.0 Disaster Relief Distribution and Loan Rules

On May 3, 2024, the Internal Revenue Service (IRS) issued a set of Frequently Asked Questions (FAQs) in Fact Sheet 2024-19 explaining the rules for distributions and loans from retirement plans and individual retirement accounts (IRAs) for individuals impacted by federally declared major disasters under section 331 of the SECURE 2.0 Act of 2022 (or the Act). Similar to past IRS guidance following large-scale federal disasters, like Hurricane Katrina and COVID-19, these FAQs provide helpful and clear guidance to plan sponsors choosing to extend all, or some of the relief to their participants in the wake of disasters.

Disaster Relief Background

Enacted on December 29, 2022, SECURE 2.0 made changes designed to modernize the retirement system by encouraging additional retirement savings, ensuring greater access to workplace retirement plans and easing administrative requirements. Amongst those changes, the Act amended the Internal Revenue Code to provide special rules for distributions and loans for individuals impacted by federally declared major disasters occurring on or after January 26, 2021. Prior to SECURE 2.0, no disaster relief applied generally for all major disasters. Instead, Congress enacted relief on an ad hoc or year-by-year basis. Under SECURE 2.0, retirement plans may offer qualified disaster recovery distributions (QDRDs) or specialized loans to participants affected by federally declared disasters. The Act includes certain guidelines for plans offering these forms of relief.

• Eligibility. Plans can offer QDRDs to eligible participants who (a) have a principal residence in the qualified disaster area during the incident period (as specified by the Federal Emergency Management Agency); and (b) have sustained an economic loss because of the disaster (e.g., personal property damage, displacement from home, or temporary or permanent layoffs). Plan sponsors may rely on a participant’s self-certification of eligibility absent any actual knowledge to the contrary.
• Distributions. QDRDs are distributable events for 401(k) plans, 403(b) plans, governmental 457(b) plans and money purchase plans (qualified individuals may also take a QDRD from an IRA). However, profit-sharing plans, defined benefit plans or other types of retirement plans are not permitted to offer QDRDs unless the participant is otherwise eligible for a distribution. Eligible individuals can receive a distribution of up to $22,000 in QDRDs per qualified disaster, across all retirement plans. Plan sponsors are responsible for ensuring an individual’s aggregate distributions from all plans within the plan sponsor’s controlled group do not exceed the distribution limit.
• Repayment of Distributions. Individuals may repay a QDRD to a qualified retirement plan or IRA in whole or in part within three years of the date of distribution. Repayments are treated as qualified rollover contributions to the plan.
• Loans. Plan sponsors may increase the dollar limit for plan loans to participants affected by a qualified disaster to an amount equal to the lesser of $100,000 or 100 percent of the individual’s account balance. Plan sponsors may also extend the due dates for repayments of loans outstanding on the later of the first day of the incident period or the date of the disaster declaration for up to one year.
• Principal Residence Distribution Relief. Individuals can repay a distribution (including a hardship withdrawal) from a 401(k) plan or 403(b) plan if such distribution was taken by a first-time homebuyer to purchase or construct a principal residence in a qualified disaster area no more than 180 days before the incident period but was not used because of such disaster. However, instead of the standard three-year repayment period, repayment must be made within 180 days after the later of the start of the incident period or disaster declaration.

FAQs Guidance

The FAQs include questions and answers on topics such as taxation and reporting, repayment and updates to the current disaster rules. Key clarifications include the following:

• Adoption is optional. The FAQs confirm that QDRDs and expanded disaster loans are optional plan changes.
• Accepting repayment. As noted in SECURE 2.0, QDRD repayments are treated as rollover contributions. The IRS suggests that a plan’s current rollover terms can control and that plans accepting rollovers must also accept QDRD repayments. However, if a plan does not already accept rollovers, the plan sponsor is not required to amend the plan to offer rollovers and accept these repayments.
• Prior Guidance. Plan sponsors may follow prior IRS guidance on similar relief for victims of Hurricane Katrina, Notice 2005-92.
• Reporting. Plans must report QDRDs on IRS Form 1099-R for the year the distribution is made and code it as an early distribution. Reporting is required even if distributions are repaid in the same year.
• Tax Burden. Similar to COVID-related distributions, income taxes for the individual receiving the relief can be spread over three years and the 10 percent additional tax on early distributions is waived.
• Reclassification of Distributions. If a plan does not offer QDRDs, participants are permitted to reclassify any plan distribution as a QDRD if they otherwise satisfy the eligibility requirements.

Action Steps

If plan sponsors choose to implement these optional provisions, no plan amendment is needed until December 31, 2026. In addition, the IRS issued an updated Defined Contribution Listing of Required Modifications, which contains approved sample language helpful for plan document amendments. Plan sponsors offering disaster relief should review their procedures to ensure compliance with the various distribution, rollover, reporting and withholding rules.

If you have any questions or need any assistance ensuring compliance, please reach out a member of the Employee Benefits Practice or your Reinhart attorney.