Tapping Retirement Savings After Tropical Storm Helene  

By Kara Brunk, Jamie Hinkle and Caryn McNeill

Our heartfelt thoughts are with everyone affected by Tropical Storm Helene. Your safety and well-being are paramount and we are here to support those impacted during this challenging time.

As employees and employers work to recover, both may be wondering about employees’ ability to tap their 401(k) or other qualified retirement plan savings to meet immediate needs. The answer depends on the particular facts and terms of an employer’s plan.

Distributions

One way to take money from a qualified retirement plan is in the form of a distribution. Participants who, unfortunately, have permanently lost their jobs can likely take a distribution of their full vested account balance since most plans permit distributions following a termination of employment. While these distributions will be subject to income taxes and potentially a 10% early withdrawal tax, they are usually easy to obtain and do not require changes to the plans.

Participants who have not permanently lost their jobs may be able to take one or more of the following types of distributions if permitted by their plan:

• Qualified Disaster Recovery Distributions (QDRDs). If a plan has this optional provision, a participant whose principal residence was in a qualified disaster area and who experienced a disaster-related loss, may take a distribution of up to $22,000 of their vested account balance within 180 days of the disaster declaration date (September 28, 2024 in NC). Unlike hardship and in-service distributions (discussed below), QDRDs are not subject to a 10% early withdrawal tax if taken before age 59 ½. In addition, QDRDs have other potential tax advantages. They are taxable in equal amounts over a 3-year period starting with the year of the distribution (unless the participant elects to include the full distribution in income in the first year), and, if repaid to the plan within 3 years of the distribution, will be treated as if they were not taxable.

• Hardship distributions. If a plan has this optional provision, participants whose principal residence or principal place of employment at the time of a disaster was located in an area designated by FEMA for individual assistance may take a distribution of their vested account balance to cover expenses and losses (including loss of income) due to the disaster. Note: hardship distributions taken before age 59½ will be subject to a 10% early withdrawal tax in addition to regular income tax amounts.

• In-service distributions. If a plan has this optional provision, participants may be able to take a distribution of the following amounts:
  • Amounts the participant rolled into the plan from a prior employer’s plan or IRA;
  • Voluntary after-tax contributions (not Roth);
  • Vested employer contributions held in the plan for at least 2 years;
  • Vested employer contributions following 60 months of plan participation; and/or
  • Their entire vested account balance if they are at least 59½ years old. Note: Some plans may permit in-service distributions of certain amounts prior to age 59½; however, in-service distributions taken before age 59½ will be subject to a 10% early withdrawal tax.

Loans

Participants who have not lost their jobs may also be able to take money from a qualified retirement plan in the form of a loan if permitted by their plan.

If a plan has this optional provision, participants can typically borrow the lesser of $50,000 or 50% of their vested account balance. Under the same IRS guidance that makes Qualified Disaster Recovery Distributions possible, some employers have opted to expand the ability to take a loan following a disaster so that eligible participants can borrow up to the lesser of $100,000 or 100% of their vested account balance. Plan loans are never taxed when made, and for loans taken under the special disaster loan rules within the same 180-day period described above, the due date for repayment of the loan may be delayed for up to one year.  

Participants, however, are cautioned that any loans taken must ultimately be repaid and accrue interest at market interest rates. If a participant should terminate employment while a plan loan is outstanding, the full loan will generally become immediately due and a participant’s failure to repay will result in the loan being treated as a taxable distribution.

Participants in need of clarity about which of the optional provisions above are already part of their retirement plans should reach out to the plan’s third-party administrator (or TPA). Employers interested in adding any of these provisions that are not already part of their plans should do the same. In-service distributions, hardship distributions and plan loans can be added by amending the plan. Amendments are not yet due for Qualified Disaster Recovery Distributions or to boost the amount of permitted loans following a disaster, so adding these features may be as simple as making a phone call.

If you have any questions regarding this Alert or are a plan sponsor exploring potential changes and plan amendments and require assistance, feel free to contact the authors or your usual Smith Anderson attorney.