How Secure 2.0 Expands Retirement Plan Hardship Withdrawals

Disaster Distributions

Following a disaster, the IRS often acts to provide relief to victims in the impacted areas. Under Secure 2.0, effective for disasters occurring on or after January 26, 2021, participants who live in a federal disaster area may withdraw up to $22,000 without penalty if the participant suffers an economic loss due to the disaster and the withdrawal is taken within 180 days of the disaster. The disaster distribution may be repaid within three years.

Effective for disasters occurring on or after January 26, 2021, if a participant took a first-time homebuyer distribution within the 180-day period prior to the disaster, the participant may repay the amounts within 180 days after the disaster. This exception to the early withdrawal penalty is only available if the taxpayer was unable to buy or construct the home due to the disaster.

The relevant distribution limits apply across all retirement plans maintained by employers considered to be members of a controlled group.

The law also amends the rules governing loans taken from retirement plans due to a federal disaster. The limit on such loans is increased to the lesser of $100,000 or 100% of the individual’s vested account balance when the participant (1) lives in a federal disaster area; (2) suffers an economic loss due to the disaster; and (3) takes the distribution within 180 days of the date the disaster occurs.

Existing loan payments that are due within 180 days of the disaster can be delayed for up to one year (and the five-year repayment deadline may also be extended).

Conclusion

Depending on a taxpayer’s individual circumstances, these new changes can offer an important source of liquidity in the face of unforeseen emergencies. Advisors should ensure that clients have the information necessary to evaluate their options when it comes to accessing retirement savings without penalty in the face of hardship.