S. 2964 — Emergency Relief for Federal Contractors Act of 2025

This section waives the 10% early withdrawal penalty under IRC §72(t) for Federal Government shutdown distributions (i.e., eligible retirement plan distributions up to $30,000, indexed for inflation after 2025, received by applicable individuals during a Federal appropriations lapse of at least two weeks). Applicable individuals include federal contractors or employees on unpaid leave or without pay due to the lapse; federally funded employees of grantees or states who are furloughed, working without pay, or with reduced pay; and certain District of Columbia employees who are furloughed or working without pay. (Thus, affected individuals may access retirement funds without the additional 10% tax normally imposed on distributions before age 59½.) The section further (1) permits repayment of the full distribution amount as a tax-free rollover to an eligible retirement plan within three years; (2) treats such repayments consistently with direct rollovers; and (3) requires income inclusion ratably over the three taxable years beginning with the distribution year (unless the taxpayer elects out). Eligible retirement plans include qualified plans, 403(b) plans, governmental 457(b) plans, and IRAs.