Need Cash to Rebuild After a Hurricane? Don’t Forget Your 401(k)

Victims recovering from the destructive path Hurricanes Helene and Milton left across the southeastern US can tap their 401(k)s to cover the cost of repairs and temporary housing if their employers opt into a little-known IRS program.

Benefits advisers whose plan clients have operations in states such as Florida and North Carolina are receiving an influx of calls about new optional tax-qualified disaster relief Congress passed under its expanded retirement access law in 2022.

For companies that adopt the new measures, their workers in a federal disaster area can withdraw up to $22,000 penalty-free from a qualified 401(k), 403(b), or individual retirement account. Retirement savers may choose to repay the money within three years without incurring any income tax liability.

Amid a uniquely volatile 2024 hurricane season, permanent tax relief that lets workers liquidate at least part of their retirement savings is coming as a welcome surprise to impacted workers. The new rules are widely preferred to the temporary, case-by-case reprieves the IRS has historically provided, especially as the effects of climate change are expected to become more frequent and worsen.

“Given what’s happening with these hurricanes, we’ve seen a real uptick in interest from our plan-sponsor clients,” said Joshua Hernandez, a pension plan compliance and administration associate at Reinhart Boerner Van Deuren SC. “I’m working with a plan that is in the trade industry that has quite a bit of participants affected, and it’s quickly looking to implement.”

There’s no accurate accounting yet of how many employers have adopted optional disaster-relief provisions under the 2022 SECURE 2.0 Act (Pub. L. No. 117–328), but third-party service providers such as Fidelity Investments Inc. are beginning to offer the add-on under a suite of low-cost options they market to basic 401(k)s.

It’s easier for recordkeepers to retool their systems to permit disaster-related distributions permanently, since they’ve been available temporarily in the past, said Karen Gelula, counsel at Faegre Drinker Biddle & Reath LLP.

‘Something for Everyone’

Retirement plans have until 2026 to formally adopt amendments under SECURE 2.0, meaning there’s still time for companies to allow qualified disaster recovery distributions retroactively.

Plan sponsors and IRA providers should poll their workforce in order to determine what kind of plan loan relief works for them, Gelula said.

“This is going to become part of the way companies communicate with and educate their workers,” she said.

The IRS issued guidance in May detailing how plan sponsors can implement qualified disaster relief distributions for their workers, and providing a slight workaround for workers who want to repay a plan loan tax-free. Regulators gave companies a pass on determining whether their workers qualify for the relief, allowing them to rely on their employees’ “reasonable representations.”

The same provisions were available under ad-hoc guidance the IRS issued after major California wildfires and the devastation wrought by Hurricane Katrina in 2005, but “it got a little ridiculous,” said Ian Berger, an IRA analyst at Ed Slott & Company LLC, “because it was uncertain and thought to be a little too political.”

Including qualified disaster distributions, SECURE 2.0 Act authorized sidecar emergency savings accounts of up to $2,500 penalty free. Plans have had the option of allowing 401(k) loans and hardship withdrawals, all of which workers could use concurrently in the event of a major disaster.

“We are starting to see a lot more outreach by vendors who are used to these provisions and are getting ready to add qualified disaster recovery distributions,” said Claire Bouffard, of counsel at Morgan, Lewis & Bockius LLP. “It’s all happening right now.”