No Penalties for Victims of Fraud Act
No Penalties for Victims of Fraud Act would add a new exception to the federal tax code (Internal Revenue Code) that waives the 10% early withdrawal penalty on distributions from certain retirement accounts when the distribution is made because the recipient is a victim of fraud. To qualify, a person must apply to the Secretary of the Treasury, provide documentation showing they were the victim of fraud (from a law enforcement agency or court), and be designated as a victim by the Secretary. The new exception would apply to distributions from applicable eligible retirement plans (excluding defined benefit plans) and would apply to distributions made after the bill’s enactment. The bill also requires Treasury guidance within 180 days and a public awareness campaign to inform people about the relief. It allows for repayment of the distributed amount under rules similar to existing provisions, which could affect how the distribution is treated for tax purposes if repaid. Plain-language note: This does not make the distribution tax-free. It simply waives the early withdrawal penalty (the additional 10% penalty for taking money out early). The normal income tax treatment of the distribution would still apply, unless other rules apply.
Key Points
- 1Creates a new penalty waiver under IRC 72(t)(2)(N) for distributions from an applicable eligible retirement plan when the recipient is a victim of fraud.
- 2Eligibility requires: (1) submitting an application for waiver to the Secretary, (2) providing documentation, and (3) being designated as a victim of fraud by the Secretary.
- 3Documentation must come from a law enforcement agency or court confirming the fraud and that it led to a distribution from the retirement plan.
- 4The distribution must come from an “applicable eligible retirement plan” (as defined in 402(c)(8)(B)) but excludes defined benefit plans; this includes many defined contribution plans (e.g., 401(k), 403(b)) and IRAs.
- 5The amount distributed may be repaid under rules similar to those that apply to certain other distributions (the bill references subparagraph H(v) for guidance on repayment).
- 6Effective date: applies to distributions made after enactment.
- 7Treasury guidance within 180 days and a public awareness campaign to educate the public about the new protections.