Emergency Relief for Federal Contractors Act of 2025
- Bill Number
- H.R. 5690
- Origin Chamber
- House
- Congress
- 119th Congress, Session 1
- Policy Area
- Taxation
- Status
- Introduced
- Latest Action
- 2025-10-03: Referred to the House Committee on Ways and Means.
- Last Updated
- 2025-12-05T21:34:42Z
AI-Generated Summary
Purpose
The Emergency Relief for Federal Contractors Act of 2025 aims to provide financial relief to individuals affected by federal government shutdowns by allowing them to withdraw money from retirement accounts without the usual early withdrawal penalty. This helps cover living expenses during periods when federal funding lapses, impacting contractors and related workers.
Key Provisions
- Penalty Exemption: Withdrawals from eligible retirement plans (such as 401(k)s, IRAs, or similar accounts) are exempt from the 10% early withdrawal penalty under Section 72(t) of the Internal Revenue Code if they qualify as "Federal Government shutdown distributions."
- Dollar Limit: The total amount that can be withdrawn penalty-free per taxable year is capped at $30,000, with adjustments for inflation starting in 2026 based on cost-of-living changes (rounded to the nearest $500). This limit applies across all plans from the same employer or controlled group.
- Repayment Option: Individuals can repay the withdrawn amount to an eligible retirement plan within 3 years, treating it as a tax-free rollover (similar to a direct transfer between accounts).
- Income Tax Treatment: The withdrawn amount is included in taxable income but can be spread evenly over 3 years unless the individual opts out. Withholding rules and certain plan requirements are waived for these distributions.
- Qualifying Events and Individuals:
- Applies during a "Federal appropriations lapse" (a continuous period of at least 2 weeks without federal funding, including partial lapses).
- Eligible people ("applicable individuals") include:
- Federal contractors or their employees on unpaid leave or working without pay.
- Employees of federal grantees or states whose pay is partly federal-funded and who are furloughed, unpaid, or face pay cuts.
- Employees of D.C. courts, public defender service, or D.C. government who are furloughed or unpaid.
- The lapse period is limited to the time the individual is directly affected.
Significant Changes to Existing Law
- Amendment to Penalty Rules: Modifies Section 72(t) of the Internal Revenue Code to create an exception for shutdown-related withdrawals, which were previously subject to a 10% penalty if taken before age 59½ (the typical retirement age threshold).
- New Repayment and Spreading Mechanisms: Introduces a 3-year repayment window and optional 3-year income spreading, similar to rules for certain disaster relief distributions, but tailored to government shutdowns.
- Plan Compliance: Retirement plans won't violate federal rules by allowing these distributions, as long as limits are followed, reducing administrative burdens on plan sponsors.
Potential Impacts
- On Citizens: Provides immediate access to savings for affected workers facing income loss, potentially reducing financial hardship, debt, or reliance on other aid during shutdowns. However, withdrawals reduce long-term retirement savings if not repaid.
- On Government Agencies: The Internal Revenue Service (IRS) may see administrative changes in processing these distributions and repayments. No direct impact on shutdown operations, but it could indirectly ease pressure on federal contractors by supporting their workforce.
- On International Relations: Minimal to none, as this is a domestic tax relief measure focused on U.S. federal funding issues.
Main Stakeholders Affected
- Individuals: Federal contractors, their employees, federal grantee workers, state employees with federal ties, and D.C. government workers impacted by shutdowns.
- Employers and Organizations: Federal contractors, grantees, states, and D.C. entities, who may retain staff more easily during lapses.
- Retirement Plan Administrators: Pension funds, 401(k) providers, and IRA custodians, who must handle these special distributions without penalty risks.
- Government Entities: IRS (for tax enforcement) and Congress (for future shutdown budgeting), as this addresses recurring fiscal disruptions.
Notable Legal, Constitutional, or Political Implications
- Legal: Establishes a targeted tax exception, potentially setting a precedent for similar relief in future crises (e.g., natural disasters or economic downturns). Ensures compliance with rollover and withholding laws through specific exemptions, avoiding conflicts with existing retirement plan regulations.
- Constitutional: No apparent challenges; it falls under Congress's taxing and spending powers (Article I, Section 8). It promotes equity for those affected by government actions without favoring any group unconstitutionally.
- Political: Responds to criticisms of shutdowns' economic toll on non-federal workers, potentially reducing political backlash against budget impasses. Could influence negotiations by softening shutdown impacts, but may face debate over the $30,000 cap or inflation adjustments as a form of taxpayer-funded relief.
This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.
Sponsor
Rep. Subramanyam, Suhas [D-VA-10]
Cosponsors (10)
Rep. Walkinshaw, James R. [D-VA-11], Rep. Beyer, Donald S. [D-VA-8], Rep. McClellan, Jennifer L. [D-VA-4], Rep. Elfreth, Sarah [D-MD-3], Del. Norton, Eleanor Holmes [D-DC-At Large], Rep. Swalwell, Eric [D-CA-14], Rep. Horsford, Steven [D-NV-4], Rep. Bell, Wesley [D-MO-1], Rep. Larson, John B. [D-CT-1], Rep. Vindman, Eugene Simon [D-VA-7]
Recent Actions
- 2025-10-03: Referred to the House Committee on Ways and Means.
- 2025-10-03: Introduced in House
- 2025-10-03: Introduced in House
Bill Versions
- Emergency Relief for Federal Contractors Act of 2025 — issued 2025-10-03 — PDF (8 pages)