Expanding Penalty Free Withdrawal Act

To amend the Internal Revenue Code of 1986 to expand the availability of penalty-free distributions to unemployed individuals from retirement plans. 1. Short title This Act may be cited as the Expanding Penalty Free Withdrawal Act 2. Expansion of exception for penalty on early distributions to unemployed individuals from retirement plans (a) In general Section 72(t)(2) (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.

Summary: 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.