Details of Public Law 116-260, section 302 , Special Disaster-Related Rules for Use of Retirement Funds

The provision waives the 10 percent early withdrawal tax for qualified disaster distributions (QDD) up to $100,000 from qualified retirement accounts. The distribution is taxed ratably over a three-year period, unless the taxpayer elects otherwise, and may be recontributed in three years, with repayments receiving direct rollover treatment.

A QDD is a distribution made to a qualified individual on or after the first day of the incident period of a qualified disaster and before 180 days after 12/27/2020. A qualified individual is defined as having a principal place of abode that is located in a qualified disaster area, and has suffered an economic loss as a result of the qualified disaster.

Disaster-Related Plan Loans

The provision also enables qualified individuals (as described above) to receive retirement plan loans in amounts up to $100,000 or 100 percent of the present value of the participant’s vested account balance. Repayment on these loans may be suspended for a period of up to one year (or up to 180 days after 12/27/2020, if longer) if repayment of the loan normally would be due during the period beginning on the first day of the disaster incident period and ending 180 days from the last day of such incident period. Interest on the plan loan must accrue during the suspension period.

Recontributions of Pre-Disaster Hardship Distributions for Principal Residence

Special recontribution rules allow recipients to recontribute hardship distributions initially taken to purchase or construct a principal residence in a qualified disaster area, but which were used for a different purpose due to the qualified disaster. The hardship distribution must have been received 180 days before and up to 30 days after the qualified disaster incident. The repayment period ends 180 days after 12/27/2020.

California conforms to IRC section 72(t), additional tax on early distributions from qualified plans tax as applicable for federal purposes for the same taxable year using a rate of 2 1/2 percent in lieu of the federal tax rate. The COVID-19 early distributions would not be subject to a California early withdrawal tax if they are not subject to the federal additional tax on early distributions. (RTC section 17085(c))

RTC section 17081 conforms to federal law regarding loans from qualified plans as of the specified date of 1/1/2015, and generally allows a qualified employer plan to provide specified loans to a participant or a beneficiary that are not treated as taxable distributions from the plan if specified conditions are met.

RTC section 17085(f) was added to conform to Section 2202(b) of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act), PL 116-136, relating to qualified retirement plan loans. However, California does not conform to the federal changes related to distributions from qualified retirement plan loans for disaster-related purposes under this Act.