Navigating Financial Relief After Natural Disasters & Personal Emergencies

This past weekend, the devastation of Hurricane Helene left communities reeling, with homes and businesses across the region facing incredible damage. Natural disasters, such as hurricanes, wildfires, and floods, can have an immense financial impact on small business owners, executives, and employees alike. As we all begin to recover and rebuild, it's essential to be aware of financial relief options—particularly those available through retirement plans.

Retirement plans may contain optional provisions that allow participants to access funds during times of hardship. With the aftermath of Hurricane Helene top of mind, let’s discuss some recent legislative options that allow participants to access funds in emergencies.

Qualified Disaster Relief Distributions (QDRDs) are an important tool for those affected by federally declared disasters like Hurricane Helene. While typically, there are penalties for withdrawing from a retirement account before the age of 59½, QDRDs allow participants to access up to $100,000 of their retirement savings ($22,000 for a distribution, and up to $100,000 in a loan, if available vested balances support it) penalty-free in the wake of a qualified disaster. Any distribution would be taxed, but participants have the option to spread the tax burden over three years or to repay the distribution to their retirement plan within that time frame, effectively making it a tax-free loan.

This provision can provide vital liquidity for families and small businesses facing unexpected costs related to damages, temporary relocation, or business interruption. If your retirement plan doesn’t currently offer QDRDs, it may be worthwhile to consider adopting this provision, especially given the unpredictable nature of natural disasters.

Other Hardship Distribution Provisions to Consider

While natural disasters are a significant reason participants may need early access to their retirement savings, there are other important hardship provisions available in many plans:

Qualified Birth or Adoption Distributions (QBADs) were created in original SECURE Act (2019). If an employee recently welcomed a child into their family, each parent can access up to $5,000 from their retirement savings under a QBAD, and this can be done for each birth or adoption. This can help with immediate costs such as hospital bills, baby supplies, or even unpaid time off work. Like QDRDs, QBADs are exempt from the penalties, and can also be repaid.

Distributions for Domestic Abuse Victims: People experiencing domestic abuse can withdraw up to $10,000 of their retirement savings to help escape a dangerous situation, pay for legal fees, or secure safe housing. These distributions also do not have an early withdrawal penalty and allow a three year repayment period, Offering this provision demonstrates a plan sponsor's commitment to employee well-being beyond the financial realm.

 Terminal Illness Distributions: Retirement plans can potentially offer a distribution option for those who are diagnosed with a terminal illness reasonably expected to result in death within 84 months. Accessing savings can ease the financial strain of medical bills, treatments, and end-of-life planning, giving employees one less thing to worry about during an already difficult time.

Why These Provisions Matter

Natural disasters and personal emergencies don’t follow a predictable schedule, and it’s during these crises that participants often need immediate access to their retirement savings. As a plan sponsor, ensuring your retirement plan includes flexible distribution options can be a lifeline for employees in need. It’s important to remember that offering these provisions doesn’t just provide financial relief—it can also boost employee loyalty, retention, and engagement by demonstrating a deep commitment to their personal well-being.

Considerations for Plan Sponsors

While adding these distribution provisions can provide valuable support to employees, plan sponsors should also consider some potential concerns. First, offering certain distributions, such as Qualified Disaster Relief Distributions (QDRDs) or hardship withdrawals, can impact non-discrimination testing (NDT). If certain groups of employees are disproportionately utilizing these provisions, it could skew the results of the plan’s annual testing, potentially leading to plan disqualification or the need for corrective action. Additionally, frequent use of hardship distributions or loans may erode participants' long-term retirement savings, which could be at odds with the plan’s goal of helping employees retire securely. Sponsors should also evaluate the administrative burden, as each distribution option comes with specific compliance requirements, detailed record-keeping, and participant communication obligations. Before implementing changes, it’s essential to consult with your retirement plan advisor to weigh these concerns and determine how to mitigate potential risks while still offering meaningful support to your employees.

 Whether it's rebuilding after a disaster or supporting employees through a personal hardship, having the right distribution provisions in place can make all the difference.

If your plan doesn’t currently offer these provisions, now may be the right time to review and consider including them. A retirement plan advisor can help guide your business through the process of updating your plan to include these options. They can also ensure that you're following all regulatory guidelines while offering the most support possible to employees. If you're looking for a Retirement Plan Advisor to help you start or manage your retirement plan, email us today, Christina.Tunison@lpl.com.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

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