3800.01 / What requirements apply to hardship withdrawals from a 401(k) plan after qualified natural disasters for 2021 and beyond?

Under prior law, Congress and the IRS had to proactively take action to provide relief for taxpayers after natural disasters.  The SECURE Act 2.0 created a permanent hardship withdrawal for qualified natural disasters.

If the disaster qualifies as a federally declared disaster, taxpayers can access up to $22,000 in retirement funds per disaster without application of the 10 percent early withdrawal penalty.  Further, the tax liability generated by the retirement account withdrawal can be spread over three years--and taxpayers can be given the option to repay the funds within three years of the withdrawal.

The maximum loan amount for individuals experiencing a qualified disaster was also increased to $100,000.

The expanded rules apply to any federally declared disaster occurring on or after January 26,
2021. Federally declared disasters are those designated by FEMA at  https://www.fema.gov/disaster/declarations.

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Planning Point: These provisions are optional.  Taxpayers should check their specific plan terms to determine whether the plan sponsor has included the expanded hardship distribution option.

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