New Tax Law Enacted
for Hurricanes Harvey,
Irma, and Maria

On Friday, September 29, 2017, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Tax of 2019. It became law on October 2nd.

Victims of Hurricanes Harvey, Irma, and Maria will benefit from the special disaster-related tax rules which have applied to some previous disasters.

After the horrific 2005 Hurricanes Katrina, Rita, and Wilma tax legislation was enacted changing on a temporary basis certain IRA and pension laws. The concept- give individuals who have suffered economic damages to have access to their IRA and pension funds to aid in their recovery without having to incur the normal tax consequences.

Similar legislation was proposed and
enacted when Senator Grassley (Iowa) was chairman of the Senate Finance Committee. In 2008 there were many tornadoes and floods in a number of midwestern states. Kevin Brady (Texas) is now the chairman of the U.S. Ways and Means Committee. He introduced on September 25, 2017, a tax bill, (The Disaster Tax Relief and Airport and Highway Extension Act of 2017) with the similar relief provisions. The U.S. House of Representatives and the U.S. Senate passed the tax relief legislation on September 28th and President Trump signed on September 29th. It became Public Law 116-53 on October 2nd.

The general rule is that a distribution from an IRA or a pension plan is subject to a 10% additional tax if the recipient has not yet attained age 59 1/2. The first favorable tax law change is that the 10% tax will not apply to any "qualified Hurricane distribution." In general, individuals directly involved with Hurricanes Harvey, Irma, and Maria will now be able to with draw funds from their IRA (and possibly from some pension plans) on or before December 31, 2018, and they will not owe the 10% additional tax. Such distribution will generally be included in income and will be taxable. Technically, there are three distinct Hurricane disaster area. With respect to Hurricane Harvey, an individual must have had her or her principal abode within the Hurricane Harvey disaster area and sustained an economic loss which occurs on or after August 28, 2017 and before January 1, 2019. With respect to Hurricane Irma, an individual must have had her or her principal abode within the Hurricane Irma disaster area and sustained an economic loss which occurs on or after September 4, 2017, and before January 1, 2019. With respect to Hurricane Maria, an individual must have had her or her principal abode within the Hurricane Maria disaster area and sustained an economic loss which occurs on or after September 14, 2017, and before January 1, 2019. However, such distributions, when aggregated, must be $100,000 or less. Any distribution in excess of $100,000 (in the aggregate) will not be a qualified Hurricane distribution and will be subject to the 10% additional tax, if applicable, and will not receive the other favorable treatments discussed below.

The second favorable tax law change is that the 20% mandatory tax withholding rule, with respect to an eligible, rollover distribution from an employer plan, will not apply if such distribution is a qualified Hurricane distribution. Individuals will be able to instruct that they do not want withholding.

The third favorable tax law change is that an individual is allowed to repay or roll over such distribution to a traditional IRA or IRA annuity, a qualified trust, 403(a) plan, 403(b) plan or an eligible 457 plan, but the time given to complete the rollover is much longer than the standard 60 days. The time period for this special rollover is, "at any time during the three-year period beginning on the day after the date on which such distribution is received." For example, if a person took a distribution of $30,000 from her IRA on September 1, 2017, then as long as she contributes the amount of $30,000 (in one or more contributions) on or before September 1, 2020, the distribution of the $30,000 will not be taxable.

The fourth favorable law change is that a person who receives a qualified Hurricane distribution will include 1/3 of the distribution in income for the year of the distribution, plus 1/3 of the distribution in each of the following two years. For example, if Sara Jones withdraws $27,000 on October 10, 2017, then she will include $9,000 in income for 2017, 2018, and 2019.

However, if Sara rolls over $24,000 on July 1, 2020, then she presumably will be entitled to refunds with respect to her 2017 and 2018 tax returns. She would owe income tax with respect to the $3,000 which she did not roll over. It appears she would owe income tax on $1,000 for 2017, 2018, and 2019.

The fifth favorable law change is that a qualified Hurricane distribution is treated as meeting the "hardship" distribution requirements set forth in sections 403(b)(7)(A)(ii), 403(b)(11) and 457(d)(1)(A).

The sixth favorable law change creates another special rollover rule. There were some individuals who withdrew money from their 401(k) or 403(b) plans to purchase or construct a principal residence in the Hurricane disaster area (but such residence was not so purchased or constructed on account of Hurricane, or withdrew funds from an IRA because they qualified as a first-time home buyer, to purchase or construct a principal residence in the Hurricane disaster area (but such residence was not so purchased or constructed on account of Hurricane. If such a person received a qualified distribution after February 28, 2017, and before September 21, 2017 then he or she will be granted rollover treatment as long as the recontribution occurs during the period beginning on August 23, 2017, and ending on February 28, 2018.

The seventh, eighth, and ninth law changes relate to three changes in the standard loan rules. The new rules will only apply to an individual whose principal place of abode is located in the Hurricane Disaster area, and who has sustained an economic loss by reason of Hurricane. Such a person is called a '"qualified individual." One standard loan rule is that the maximum amount which can be borrowed is $50,000. This law increases the maximum loan amount to $100,000. A second standard loan rule is that a loan must be sufficiently collateralized and only 50% of a person's vested account balance may be used as collateral. Although the law allowed a person to pledge additional collateral, most plans were written to limit the loan to 50% of a person's vested account balance because the plan administrator did not want to have to administer the collateral. A qualified individual will not need to pledge any collateral, because under the new law he or she is now allowed to use 100% of his or her vested account balance as collateral. A third standard loan rule is that the loan must be repaid over a five-year period. With respect to those individuals within the Hurricane Harvey disaster area who have suffered economic loss, the new law delays for one year all subsequent loan payments due with respect to an outstanding loan as of August 23, 2017. With respect to those individuals within the Hurricane Irma disaster area who have suffered economic loss, the new law delays for one year all subsequent loan payments due with respect to an outstanding loan as of September 4, 2017. With respect to those individuals within the Hurricane Maria disaster area who have suffered economic loss, the new law delays for one year all subsequent loan payments due with respect to an outstanding loan as of September 14, 2017.

The IRS will certainly be issuing further guidance of these new laws and their impact on IRAs and pension plans. The law contains a provision that provides that pension plans will remain "qualified" until on or before the last day of the first plan year beginning on or after January 1, 2017, or such later date as the Secretary of the Treasury may prescribe. The IRS will be giving guidance as to how and when amendments (including model amendments) may be adopted by a sponsoring employer.