In the wake of recent wildfires in Los Angeles County, many residents may find financial relief through their employer-sponsored retirement plans. Due to the expansion made by the SECURE 2.0 Act, participants in certain retirement plans—such as 401(k) and 401(a) plans—can access increased loan limits if they reside in a disaster area and have been economically impacted by a federally declared “qualified disaster.” President Biden recently designated the wildfires as a major disaster, making this financial aid accessible for affected individuals.
Residents in these disaster areas may borrow up to the lesser of $100,000 or 100% of their vested benefit, a substantial increase from the standard limit of $50,000 or 50% of the vested benefit. Retirement plan loans typically carry an interest rate of “prime plus 1%,” and unlike traditional loans, interest payments are returned to the employee’s retirement account, offering a more appealing alternative for many. Furthermore, these plans generally avoid early payoff penalties, which are usually applicable to other types of loans in California, like real estate-backed loans.
For those unable to borrow, Section 331 of the SECURE 2.0 Act provides an alternate option. Employees can receive up to $22,000 as a qualified disaster recovery distribution, provided their principal place of abode is in the disaster area and they have suffered economic loss. Importantly, these distributions exempt the 10% early distribution penalty tax and mandatory 20% withholding. Tax on the distribution can be spread over three years, and if the amount is recontributed within three years, it can effectively become a tax-free plan rollover.
Aside from loans and qualified disaster recovery distributions, retirement plans may offer other options such as hardship distributions or pension-linked emergency savings accounts. Employers are encouraged to familiarize themselves with these provisions to better support their employees in crisis situations. These financial options could provide a crucial lifeline to employees facing immediate needs caused by natural disasters.
For more detailed information on these retirement plan provisions, you can visit the original article by Alison Wright and Soohuen Ham.