Clients Can Tap Their 401(k) After a Disaster. Here's What to Know.
Effective for disasters occurring on or after Jan. 26, 2021, if a participant took a first-time homebuyer distribution within the 180-day period before the disaster, the participant may repay the amounts within 180 days after the disaster. This exception to the early withdrawal penalty is available only 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.
Plans that can offer qualified disaster recovery distributions include 401(k) plans, individual retirement accounts, 403(b) plans, governmental 457(b) plans and even money purchase plans. However, the law did not change the distribution rules to allow qualified disaster recovery distributions from defined benefit plans.
Expanded Disaster-Related Loan Provisions
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.
The generally applicable loan limit, when no disaster has occurred, is the lesser of $50,000 or 50% of the individual’s vested account balance. Again, the expanded loan relief is optional for plan sponsors, so it’s important to check terms of the plans, which may opt to allow qualified disaster recovery distributions and not allow plan loans, and vice versa.
Qualifying participants who are entitled to make use of the expanded plan loan provisions are those who (1) live in a federal disaster area, (2) suffer an economic loss due to the disaster and (3) take 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. The generally applicable five-year repayment deadline may also be extended.
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