401(k) emergency distributions for workers recovering from tropical storm Debby: IRS
With extensive damage to homes and property, the IRS is allowing 401(k) plan participants in South Carolina, North Carolina, Florida and Georgia to take out special disaster distributions from their retirement accounts.
With tropical storm Debby causing severe damage to homes and neighborhoods in the eastern states, the IRS announced on Friday that financial relief is available to individuals and businesses in these federally declared disaster areas, which have suffered heavy rain, flooding and tornado warnings.
Affected taxpayers in South Carolina, North Carolina, Florida and Georgia now have until Feb. 3, 2025, to file various federal individual and business tax returns and make tax payments. Also, 401(k) plan participants can take out special disaster distributions from their retirement accounts, if needed.
In addition, in Florida, penalties for failing to make payroll and excise tax deposits due on or after Aug. 1, 2024, and before Aug. 16, 2024, will be abated, as long as the deposits are made by Aug. 16, 2024. Similarly, in South Carolina and Georgia, penalties for failing to make payroll and excise tax deposits due on or after Aug. 4, 2024, and before Aug. 19, 2024, will be abated, as long as the deposits are made by Aug. 19, 2024. In North Carolina, penalties for failing to make payroll and excise tax deposits due on or after Aug. 5, 2024, and before Aug. 20, 2024, will be abated, as long as the deposits are made by Aug. 20, 2024.
Employers also need to make retirement plan participants in affected areas aware of distribution options available to them if they need to seek an emergency distribution or loan from their 401(k) to pay for any major home repairs.
For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.
Related: IRS, Treasury issue updated guidance on 401(k) emergency distributions
The maximum amount of distribution that a participant can take from the plan is $22,000. These distributions, which will not be subjected to the 10% tax penalty, are allowed within 180 days from August 6, the date that tropical storm Debby was declared a disaster by FEMA.
If a plan participant takes a distribution, they have three years from the day of withdrawal to pay back the funds.