Expanding Penalty Free Withdrawal Act

Expanding Penalty Free Withdrawal Act

This bill expands the exceptions in the Internal Revenue Code that permit penalty-free distributions to unemployed individuals from retirement plans.

The 10% additional tax on early distributions from retirement plans does not apply to an individual after separation from employment if (1) the individual has received federal or state unemployment compensation for 26 consecutive weeks or, if less, the maximum period available under state law; and (2) the distributions are made during the year or the succeeding year in which the compensation is paid.

The exception is limited to the lesser of (1) $50,000 from all plans of the individual over a one-year period, or (2) the greater of $10,000 or one-half of the fair market value of the individual's retirement plans and the nonforfeitable portion of the individual's defined contribution plans.

The exception does not apply to distributions that are (1) included in the existing exception for distributions to unemployed individuals for health insurance premiums, or (2) are made after the individual has been employed for at least 60 days after the separation.

[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[H.R. 585 Introduced in House (IH)]

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118th CONGRESS
  1st Session
                                H. R. 585

 To amend the Internal Revenue Code of 1986 to expand the availability 
of penalty-free distributions to unemployed individuals from retirement 
                                 plans.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            January 26, 2023

    Mrs. Watson Coleman (for herself and Ms. Norton) introduced the 
 following bill; which was referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to expand the availability 
of penalty-free distributions to unemployed individuals from retirement 
                                 plans.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Expanding Penalty Free Withdrawal 
Act''.

SEC. 2. EXPANSION OF EXCEPTION FOR PENALTY ON EARLY DISTRIBUTIONS TO 
              UNEMPLOYED INDIVIDUALS FROM RETIREMENT PLANS.

    (a) In General.--Section 72(t)(2) of the Internal Revenue Code of 
1986 is amended by adding at the end the following new subparagraph:
                    ``(I) Long-term unemployment distributions.--
                            ``(i) In general.--Distributions to an 
                        individual after separation from employment--
                                    ``(I) if such individual has 
                                received unemployment compensation for 
                                26 consecutive weeks under any Federal 
                                or State unemployment compensation law 
                                by reason of such separation (or, if 
                                less, for the maximum period for which 
                                unemployment compensation is available 
                                under State law applicable to the 
                                individual), and
                                    ``(II) if such distributions are 
                                made during any taxable year during 
                                which such unemployment compensation is 
                                paid or the succeeding taxable year.
                            ``(ii) Distributions after reemployment; 
                        self-employed individuals.--Rules similar to 
                        the rules of clauses (ii) and (iii) of 
                        subparagraph (D) shall apply for purposes of 
                        this subparagraph.
                            ``(iii) Limitation.--Clause (i) shall not 
                        apply to any distribution to the extent that 
                        such distribution exceeds the lesser of--
                                    ``(I) $50,000, reduced by the 
                                aggregate amount of distributions which 
                                are described in clause (i) from all 
                                plans of the individual during the 1-
                                year period ending on the day before 
                                the date on which such distribution was 
                                made, or
                                    ``(II) the greater of $10,000 or 
                                one-half of the aggregate fair market 
                                value (at the time of the distribution) 
                                of the individual's qualified 
                                retirement plans (as defined in section 
                                4974(c)) and the nonforfeitable portion 
                                the individual's defined contribution 
                                plans.
                            ``(iv) Coordination with distributions to 
                        unemployed individuals for health insurance 
                        premiums.--Distributions shall not be taken 
                        into account under this subparagraph if such 
                        distributions are described in subparagraph 
                        (D).''.
    (b) Effective Date.--The amendments made by this section shall 
apply to distributions made after December 31, 2022.
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