Emergency Relief for Federal Contractors Act of 2025
This bill, titled the Emergency Relief for Federal Contractors Act of 2025, would create a new category of penalty-free distributions from retirement accounts for individuals affected by a Federal Government shutdown. Specifically, it allows eligible individuals—primarily Federal contractors and certain related workers—to receive “Federal Government shutdown distributions” without the 10% early-withdrawal penalty (the 72(t) rule). The annual cap for these distributions is $30,000 (adjusted for inflation after 2025) and is applied on a per-taxpayer basis across all plans through the employer’s controlled group. Tax treatment can be elected to spread income from the distribution over three years, and individuals may repay the amount to eligible retirement plans within a 3-year window, with rollover mechanics to preserve tax deferral. The bill defines what constitutes a Federal Government shutdown distribution, who is an applicable individual, and what counts as a Federal appropriations lapse.
Key Points
- 1Penalty-free access up to $30,000 per taxable year for a Federal Government shutdown distribution, with inflation adjustment after 2025; aggregate limit applies across all plans maintained by the employer’s controlled group.
- 2Exemption from the 10% early withdrawal penalty (Section 72(t)) for these shutdown distributions; distributions can still be taxed, but the bill provides optional methods to manage timing of taxation (see Point 3).
- 3Repayment option: individuals may, within a 3-year period, contribute an amount equal to the shutdown distribution back into an eligible retirement plan (including IRAs) and treat the repayment as a rollover, subject to specified trustee-to-trustee transfer rules (within 60 days when applicable).
- 4Tax treatment options: unless the taxpayer elects otherwise, the amount included in gross income from the shutdown distribution can be ratably spread over the 3 tax years beginning with the year of distribution; an election to opt out is allowed.
- 5Definitions and scope: “Applicable individual” includes Federal contractors or their employees on unpaid leave or working without pay due to a lapse, certain state-related or grantee employees funded by the Federal Government, and certain District of Columbia government employees, with a Federal appropriations lapse defined as a continuous two-week period of lapse (or longer) in federal funding.