The devastating wildfires in Southern California, now designated as a federal disaster, highlight the critical role plan sponsors can play in supporting their workforce during times of crisis. The SECURE Act of 2022 (called SECURE Act 2.0) includes several provisions that can be used by plan sponsors to get impacted participants access to much needed funds quickly.
SECURE Act 2.0 expands access to retirement funds
Prior to SECURE Act 2.0, when disasters occurred and participants needed to access funds from their retirement plans, the primary methods for doing so were taking either a hardship distribution (subject to a 10% penalty) or a plan loan (generally capped at the lesser of $50,000 or 50% of an employee’s vested account balance). When circumstances were more severe, the IRS would often (but not always) grant expanded access to distributions and loans.
SECURE Act 2.0 essentially codified the ad hoc IRS guidance previously issued in connection with federally declared disasters to provide three sources of expanded access to retirement funds: (1) qualified disaster relief distributions; (2) increased loan limits; and (3) loan repayment suspensions. Each is described in more detail below.
Qualified disaster relief distributions
Qualified disaster relief distributions (QDRDs) can be offered under 401(k), 403(b), money purchase plans, or governmental 457(b) plans. Key requirements include:
- Eligibility: any participant whose principal residence is in an area covered by the federally declared disaster and who experiences an economic loss as a result of the disaster (a Qualified Individual).
- Timing: a QDRD must be taken within a period that starts on the first day of the incident period (i.e., the period during which the disaster occurred) and ends 180 days after the later of the first day of the incident period or the date of the disaster declaration (the Disaster Relief Period).
- Maximum Distribution: $22,000 per disaster. Note that the limit is applied on an aggregate basis to all plans sponsored by the plan sponsor.
- Early Withdrawal Penalty: the 10% early withdrawal penalty is waived.
- Tax Flexibility: participants can spread the income tax attributable to the distribution over a period of three years.
- Repayment: participants can repay the distribution to the plan within three years to reduce or eliminate the associated tax burden.
Increased loan limits and repayment suspension
SECURE Act 2.0 also allows for increased loan limits and repayment suspension. For any loan initiated during the Disaster Relief Period, a Qualified Individual can obtain a loan up to the lesser of $100,000 or 100% of the vested account balance. For any loan that a Qualified Individual has outstanding on or after the later of the first day of the incident period or date of the disaster declaration, any repayment due during the Disaster Relief Period can be delayed for up to one year. After the repayment delay, payments will be adjusted/re-amortized to reflect the accrual of interest.
Plan sponsor action items
A plan sponsor wishing to implement any of the three enhancements should contact their recordkeeper to ensure the recordkeeper is prepared to administer them. Plan sponsors should also consider consulting with legal counsel to ensure plan documents are properly amended to reflect the selected options (the deadline to amend is generally December 31, 2026) and that participant communications accurately reflect the nature of the relief.