The Consolidated Appropriations Act 2021 Includes Retirement Plan Modifications for Disaster-Related Distributions

The lengthy Consolidated Appropriations Act, 2021 (comprised of over 5,593 pages) was passed by both Houses of Congress on December 21, 2020 and signed into law by President Trump on December 27, 2020.

The Taxpayer Certainty and Disaster Tax Relief Act (TCDTR)—passed as part of the Consolidated Appropriations Act, 2021 - has three key provisions regarding retirement plans.

Let's begin by explaining each of these three critical issues in more detail.

   1. 10% early withdrawal penalty does not apply to qualified disaster distributions

While a 10% early distribution penalty generally applies to, among other things, a distribution from employer retirement plan to an employee who is under the age of 59½, under the new law, that early withdrawal penalty does not apply to any qualified disaster distribution. 

   2. Re-contributions of retirement plan distributions used for home purchase in a qualified disaster area

The change proposed in TCDTR provides that any individual who has received a qualified distribution can, during the prescribed applicable period, make one or more contributions in an aggregate amount not to exceed the amount of such qualified distribution, to an eligible retirement plan of which the individual is a beneficiary and to which a rollover contribution of such distribution could be made under the Code.

   3. Increased limit for plan loans made pursuant to a disaster

In general, the Code provides that a loan from a Retirement Plan to the Plan owner is not a taxable distribution to the extent that the loan (when added to the outstanding balance of all other loans from the Plan whether made on, before, or after August 13, 1982), does not exceed the lesser of $50,000 or the greater of one-half of the present value of the non-forfeitable accrued benefit of the employee under the Plan or $10,000 under circumstances as described in the Act.

Conclusion

While the Taxpayer Certainty and Disaster Tax Relief Act (TCDRA) provides specific guidance and well-defined parameters for three key areas that focus on retirement plan modifications for disaster-related distributions, we have offered this abbreviated version to provide you with some highlights regarding these core points.

We invite you to contact us and we will be happy to discuss these issues in detail with you and address how these proposed changes will impact you if the TCDTR is enacted into law. 

elizabeth.harper@sobelcollc.com