Bush Storm Relief Bill Includes Plan Distribution, Loan Provisions

September 28, 2005 (PLANSPONSOR.com) - President Bush has signed into law a series of tax breaks for Katrina victims including the loosening of rules for distributions and loans from workplace retirement plans or IRAs.

Among the provisions of the  Katrina Emergency Tax Relief Act of 2005affecting the retirement services community are:

  • a waiving of the customary 10% early withdrawal penalty for money taken out of IRAs or company retirement plans with a maximum distribution of $100,000 for qualified hurricane victims.Taxes on the money can be spread over three years. Or, if the money is repaid within three years, the distribution is exempt from federal income tax. The distributions will also be exempt from the 20% withholding tax that normally applies to pre-retirement distributions that are not taken as an annuity or rolled over into another qualified plan.
  • An increase in the customary $50,000 ceiling on hardship loans to $100,000. Previously, loans were limited to the lesser of $50,000 or half of a defined contribution plan vested account balance. A loan repayment scheduled for between August 25, 2005 and December 31, 2006 is delayed for a year while subsequent repayments on the loan will be adjusted for the one-year delay. Interest payments will also be similarly delayed.

The federal tax breaks are reserved for ” qualified individuals” which the law defines as those whose primary home as of August 28, 2005 is in the Hurricane Katrina disaster area and who have sustained an economic loss because of the storm.

Loan Repayment Worries

A representative of one plan provider said there is concern if cash-strapped storm victims dip into their retirement accounts to take a loan for people who may still be hit with storm-related expenses they aren’t yet aware of or might lose their jobs and won’t be able to repay the money. The unpaid loan is eventually considered a plan distribution and taxed.

“There is a concern that if the employee takes a loan, it’s more probable that they may not be able to pay it off,” said Howard Heller, a senior ERISA compliance analyst at T. Rowe Price.

Heller said it may well be worth it for participants to opt for a distribution because repayments can be made over three years and because of the tax breaks in the recently signed bill for those payments. “We think that’s the better route,” Heller said in a PLANSPONSOR.com interview.

Heller said his company has been working closely with affected plan sponsors to carefully track affected employees who may need retirement plan transactions to help pay their storm-related expenses. For those participants being tracked, Heller said his company is preparing a number of unusual procedures such as electronically wiring funds to an alternate address if a person was displaced to somewhere else in the country.

The White House announcement about the bill signing is  here .