For many employers who sponsor qualified retirement plans and have employees impacted by the various natural disasters that occurred in 2016, the 2017 Tax Act offers important relief. Specifically, the Act provides favorable tax treatment for certain qualified retirement plan distributions to employees affected by 2016 natural disasters. The relief includes:

  • Income inclusion for distributions spread over 3 years;
  • Distributions exempt from early withdrawal penalties (the 10% additional tax); and
  • Permissible repayment of distributed amounts into the plan.

An important aspect of the relief is that it requires plan sponsors to take action in 2018 in order to assist affected employees. Employers should consider amending their retirement plans to offer the relief offered by the Act. However, with the relief comes unanswered questions as to how employers wishing to provide these benefits should administer their plans. For example:

  • What are the tax reporting/withholding implications associated with qualified 2016 disaster distributions? For example, since withholding and reporting has presumably already occurred, are there additional actions employers should take with respect to these now qualified distributions?
  • Do employers who offer the relief need to accept repayments from new employees who received qualified disaster distributions from their prior employer’s plan?
  • If so, what information sharing requirements will be required for outgoing/incoming employees in order to allow employers to administer repayments?
  • What types of distributions (e.g., loans) can be re-characterized as qualifying for this relief?

This tax relief appears very favorable for impacted employees and should be seriously considered by employers. The operational hurdles outlined above may present challenges, though we hope that additional (and timely) regulatory guidance provides the comfort needed for employers to extend these benefits to employees in need.