Can Our Employees Withdraw from 401k Because of COVID and Wildfires?

This month we have a question dealing with employees needing to withdraw from their 401k because of COVID and also because of wildfires…

Answer: No, but there may be another solution for them. Recognizing that many businesses and employees are suffering the financial effects of fires and other natural disasters, Congress changed the rules about plan loans and distributions for them. Similar to 2020’s COVID relief rules, the Consolidated Appropriations Act, 2021 (the Act), provides for qualified disaster distributions. Those who are eligible for these types of distributions may withdraw up to $100,000 from their eligible retirement account without penalty or withholding. Like a COVID relief withdrawal, the withdrawals may be recontributed over a three-year period. Also allowed under the Act are plan loans up to $100,000 or 100% of the present value of the participant’s vested account balance for qualified individuals. The Act makes an additional provision for participants who took a hardship distribution for the purchase or construction of a principal residence in a qualified disaster area. Such distributions, taken between 180 days before and 30 days after the qualified disaster incident, may be recharacterized if the money was ultimately used for a different purpose because of the disaster. With so many complexities involved in these new rules, we recommend speaking to the plan’s legal counsel for guidance.

Ready to discuss your retirement plan with a 401(k) Advisor?

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