What Is a 2020 Qualified Disaster Distribution?
This provision offered financial flexibility for those impacted by 2020 disasters. Understand the tax advantages and reporting rules for these retirement distributions.
A 2020 qualified disaster distribution was a specific type of withdrawal from an eligible retirement plan intended to provide financial assistance to individuals impacted by certain major disasters that occurred in 2020. These temporary provisions were formally established under the Consolidated Appropriations Act, 2021, creating a way for affected persons to access their retirement funds without some of the usual penalties. The purpose of this measure was to offer liquidity to those facing economic hardship as a direct result of a federally declared disaster. While these rules were specific to 2020 disasters, subsequent legislation has established a permanent framework for disaster relief distributions for major disasters in later years.
Determining Eligibility for the Distribution
To have taken a qualified disaster distribution, an individual must have met specific criteria. The person’s main home must have been located within a qualified disaster area, and they must have sustained an economic loss because of the disaster. An economic loss could encompass a wide range of financial setbacks, including the costs of repairing or rebuilding a home, loss of personal property, or loss of income due to a temporary business closure or job disruption caused by the disaster.
The window for taking these distributions was limited. For qualified 2020 disasters, the withdrawal had to be made no later than June 24, 2021.
A “qualified 2020 disaster” referred to any major disaster declared by the President under the authority of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during the 2020 calendar year. The COVID-19 pandemic was explicitly excluded from this definition for these distributions. A comprehensive list of all applicable 2020 disasters was maintained by the Federal Emergency Management Agency (FEMA).
These distributions could be taken from a variety of retirement accounts. Eligible plans included:
- Traditional and Roth IRAs
- 401(k)s
- 403(b)s
- Governmental 457(b) plans
This broad eligibility allowed many individuals with different types of retirement savings to access this relief.
The total amount of qualified disaster distributions for any single person could not exceed $100,000. This limit was an aggregate total, meaning it applied across all of an individual’s retirement plans combined, not per plan.
Tax Treatment and Reporting
The tax benefit of a qualified disaster distribution was the waiver of the 10% additional tax that normally applies to early withdrawals from retirement plans for individuals under age 59½. This waiver provided immediate relief by allowing access to funds without the standard penalty. Individuals were also given flexibility in how they reported the distribution as income for tax purposes.
Taxpayers had two options for including the distribution in their gross income. The first choice was to report the entire amount in the year the distribution was received. The alternative was to spread the income inclusion ratably over a three-year period. For example, a $90,000 distribution could be reported as $30,000 of income on the 2020, 2021, and 2022 tax returns. This three-year period for reporting has now concluded.
Taxpayers were required to use Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, to report these distributions. This form was specific to 2020 disasters; for disasters occurring in 2021 and later, the IRS now uses Form 8915-F. On this form, the taxpayer had to report the total amount of the distribution and elect how to recognize the income, either in full for that year or over the three-year period.
Repaying the Distribution
Individuals who took a qualified disaster distribution were given the option to repay the funds to restore their retirement savings. The rules allowed for the repayment of all or part of the distribution to an eligible retirement plan. The repayment window was three years, beginning on the day after the distribution was received. Because all distributions had to be taken by mid-2021, the three-year repayment period has now expired for all 2020 qualified disaster distributions.
When a repayment was made within the allowable window, it was treated for tax purposes as a tax-free rollover. This meant the repaid amount was not included in the individual’s income, and no tax was due on the repayment itself.
The timing of a repayment could create a need to amend prior tax returns. If an individual included a portion of the disaster distribution in their income on a filed tax return and then repaid that amount in a subsequent year, they needed to take action to recover the taxes paid. This required filing Form 1040-X, Amended U.S. Individual Income Tax Return, for the year the income was originally reported. Along with the Form 1040-X, the individual also had to file a revised Form 8915-E for the amended year. Any such amendments are now subject to the standard time limits for filing a corrected return.