Residents of Katrina disaster areas would benefit

Washington

Bipartisan legislation being rushed through Congress would waive the 10% penalty for early withdrawal of funds from IRA retirement plans for individuals living in a federally declared disaster area.

Both the House and Senate passed different versions of the bill by voice vote on Sept. 15. Those bills, H.B. 3768 and S.B. 1696, will now be reconciled. It is still likely that it will be on President Bush’s desk and signed by Sept. 23, industry lobbyists and congressional staffers said.

The provision is among a number of tax-abatement provisions contained in the bills.

The Internal Revenue Service also was expected to issue new guidance allowing workers to immediately take hardship withdrawal distributions or loans from their 401(k)-type plans, even where currently not allowable under the plan, according to officials of the American Society of Pension Professionals & Actuaries, Arlington, Va. The IRS guidance also would expedite loan requests by reducing the paperwork normally required to borrow from a 401(k)-type plan, according to ASPPA officials.

The ASPPA officials said they worked with the IRS and the congressional leadership to draft the program aimed at helping people dealing with the Hurricane Katrina catastrophe.

Such legislation was introduced on Sept. 12 in the Senate by senior members of the Senate Finance Committee, Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont., and in the House late on Sept. 14.

ASPPA officials said the legislation and IRS guidance “would make it easier for victims of Hurricane Katrina to withdraw desperately needed cash from their retirement accounts.”

The House legislation was introduced by Rep. Jim McCrery, R-La., chairman of the Social Security Subcommittee of the House Ways and Means Committee.

Regarding withdrawals from retirement plans, the proposal would waive the 10% penalty tax for premature distributions from IRAs and qualified retirement plans (including defined benefit plans, 401(k) plans and 403(b) plans) for individuals.

Besides removing some of the penalties for early withdrawal of funds for retirement plans, the legislation would: allow victims of Katrina to exclude from gross income otherwise taxable IRA account withdrawals for a charitable contribution; to raise the permitted individual limit for cash contributions from 50% to 60% for donations made this year; and would give the IRS commissioner permission to extend deadlines for filing tax returns and paying income, estate and gift taxes. Under the latter provision, employment and excise taxes are specifically excluded.

Individuals eligible for waivers because of Katrina would be permitted to pay income tax on such distributions over a 3-year period, according to a section-by-section draft of the legislation distributed by the Finance Committee. Amounts distributed could be re-contributed to a qualified retirement plan over the 3-year period following the distribution date and receive rollover treatment.

Distributions for home purchases, which were not finalized because of Hurricane Katrina, also could be re-contributed to a qualified retirement plan or IRA.

The charitable rollover provision would exclude from gross income otherwise taxable Individual Retirement Account (IRA) withdrawals from a traditional or a Roth IRA for qualified charitable distributions. Under the provision, taxpayers who are 70 1/2 and older would be allowed to roll over amounts from their IRA accounts directly to a qualified charitable organization on a tax-free basis. In addition, the provision allows taxpayers aged 59 1/2 and older to transfer IRA funds to a charitable remainder trust and give a remainder interest in the trust to charity without tax consequence.

Regarding the taxes-due provision, Sens. Grassley and Baucus explained that the IRS already had issued a notice for victims of Katrina extending the time period until Jan. 3, 2006, to file any returns, pay any taxes or make any deposits due.

“Although this is intended to apply to employment and excise taxes, it is unclear that the IRS has the authority to do so,” they explained. “This proposal extends the deadlines until Feb. 28, 2006, and clarifies that the extension includes employment and excise taxes in addition to income, estate and gift taxes,” they said in a statement. Penalties and interest that would otherwise apply are waived, they added.

The Senate Finance Committee’s bill would provide crucial tax relief for plan participants taking Katrina-related hardship withdrawal distributions, ASPPA officials said. The bill would waive the 10% penalty for early withdrawals, as well as allow a participant to pay tax on the distribution over a 3-year period. Such hardship withdrawals could later be contributed back to the plan within a 3-year period.

The legislative package also would suspend any payments due on existing loans for up to a year and allow participants to borrow up to a maximum of $100,000 of their account balance. The package would also extend all plan filing and funding deadlines for a minimum of 6 months, with a provision for further extensions, ASPPA officials said.

Brian Graff, ASPPA’s executive director and CEO stated, “On behalf of our members and all other affected by this tragedy, we greatly appreciate the quick action taken by Congress and the administration to provide this much needed relief for the qualified retirement plan rules.”

Legislation is expected to be before the President by Sept. 23