3799 / What special rules governing retirement plan distributions were implemented for 2018 and 2019 disaster areas?

The 2019 Tax Certainty and Disaster Relief Act extended the rules governing qualified disaster distributions from retirement accounts, discussed below for victims of disasters that occurred in 2018 through 60 days after enactment of the bill (December 20, 2019). The distribution itself must be made within 180 days after enactment of the law to qualify. See Q . See also Q for a discussion of how the CARES Act expanded the retirement plan distribution rules for 2020 in response to the COVID-19 pandemic.

The 2017 tax reform legislation,¹ the 2017 Disaster Tax Relief and Airport and Airway Extension Act,² and the Bipartisan Budget Act of 2018,³ include special tax relief for taxpayers affected by certain presidentially declared disasters that occurred in 2016 and 2017.

A 2016 qualified disaster is a major disaster that was declared in 2016 by the president. A 2016 qualified disaster distribution is any distribution received from an eligible retirement plan in 2016 or 2017 if the recipient’s main home was located in a 2016 qualified disaster area and the recipient sustained an economic loss from the disaster.

A 2017 qualified disaster is limited to Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires. To be a 2017 qualified disaster distribution, the following requirements must be met:

1. The distribution was made:

a. After August 22, 2017, and before January 1, 2019, for Hurricane Harvey or Tropical Storm Harvey (both referred to as Hurricane Harvey);

b. After September 3, 2017, and before January 1, 2019, for Hurricane Irma;

c. After September 15, 2017, and before January 1, 2019, for Hurricane Maria; or

d. After October 7, 2017, and before January 1, 2019, for California
wildfires.

2. The recipient’s main home was located in a disaster area listed below on the date or any date in the period shown for that area.

a. August 23, 2017, for the Hurricane Harvey disaster area.

b. September 4, 2017, for the Hurricane Irma disaster area.

c. September 16, 2017, for the Hurricane Maria disaster area.

d. October 8, 2017 to December 31, 2017, for the California wildfire disaster area.

3. The recipient sustained an economic loss because of Hurricane Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires

None of the Acts define economic loss. Examples of economic loss include loss, damage, or destruction of real or personal property; loss related to displacement from a home; and loss of livelihood due to temporary or permanent layoff.⁴ There is no requirement that the amount of the qualified disaster distribution relate to the amount of the taxpayer’s economic loss from the disaster or be made on account of the disaster.

The Acts provide special rules for distributions from retirement accounts (qualified plans, 403(a)s, 403(b)s, governmental 457(b)s, and traditional, SEP, SIMPLE, and Roth IRAs). Distributions from retirement accounts made because of a qualified disaster are exempt from the 10 percent early distribution penalty (or 25 percent early distribution penalty for certain SIMPLE IRA distributions) if the penalty would otherwise be imposed under IRC
Section 72(t). Qualified disaster distributions are treated as meeting the applicable plan’s distribution requirements. The amount that may be treated as a qualified disaster area distribution is limited to $100,000 (the amount for any given year must be reduced by the amounts treated as 2016 disaster area distributions in prior years).

If a taxpayer is affected by multiple qualifying disasters, the $100,000 limit is applied separately to each disaster distribution. Taxpayers may recognize income attributable to a qualified disaster distribution over a three-year period beginning with the year the qualified disaster distribution was made (unless an election to the contrary is made).

In addition, taxpayers are also permitted a three-year period from the day after the distribution is received to make a repayment of qualified disaster distributions that is eligible for tax-free rollover treatment to an eligible retirement plan or made on account of a hardship. These repayments may be made at once or via a series of payments and will essentially be treated as though they were rollovers made within the 60-day window. A repayment to an IRA is not considered a rollover for purposes of the one-rollover-per year limitation for IRAs. The following types of distributions cannot be repaid:

• Qualified disaster distributions received as a beneficiary other than as a surviving spouse


• Required minimum distributions


• Periodic payments other than from an IRA that are for 10 years or more, the recipient’s life or life expectancy or the joint lives or life expectancies of the recipient and their beneficiary.

Plans that make such a distribution also are protected against potential disqualification. Plans that permit qualified 2016 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2018. Plans that permit qualified 2017 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2019.

Taxpayers who received certain distributions from retirement plans to buy or construct a principal residence but did not buy or construct the residence because of Hurricane or Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires had the opportunity to recontribute the distributions to an eligible retirement plan. The distributions had to be repaid before March 1, 2018 for repayments as a result of a hurricane or July 1, 2018 for repayments due to the California wildfires. A distribution that was not repaid before the applicable date may be taxable for 2017 and subject to the 10 percent additional tax on early distributions (or the 25 percent additional tax on certain SIMPLE IRA distributions).

Individuals affected by a qualified disaster (as extended by the 2019 law) qualify for relaxed rules on loans from qualified plans. The plan administrator may increase the regular $50,000 limit on plan loans to $100,000 and the 50 percent of vested benefit limit to 100 percent. For individuals affected by a hurricane, the loan must have been made between September 29, 2017 and December 31, 2018. For someone affected by the California wildfires, the loan must have been made during the period beginning February 9, 2018 and ending on December 31, 2018. In addition, loan payments due during a specified period ending on December 31, 2018 may be suspended for one year by the plan administrator. The period begins on:

• August 23, 2017 if the recipient’s home was located in the Hurricane Harvey disaster area


• September 4, 2017 if the recipient’s home was located in the Hurricane Irma disaster area


• September 16, 2017 if the recipient’s home was located in the Hurricane Maria disaster area; or


• October 8, 2017 if the recipient’s home was located in the California wildfire disaster area.

Casualty losses associated with a qualified 2016 or 2017 disaster are deductible regardless of whether total losses exceed 10 percent of the taxpayer’s adjusted gross income (AGI), so long as the loss exceeds $500 per casualty. Taxpayers who do not itemize their deductions may increase their standard deduction by the net qualified disaster loss.