This bill allows federal contractors and affected government employees to make tax-advantaged retirement plan withdrawals during a government shutdown, with provisions for repayment within three years.
Suhas Subramanyam
Representative
VA-10
The Emergency Relief for Federal Contractors Act of 2025 allows individuals affected by a federal appropriations lapse to make tax-favored withdrawals of up to \$30,000 from their retirement plans without incurring early withdrawal penalties. These distributions can be repaid within three years and the taxable income can be spread over three years. This relief specifically targets furloughed federal contractors, grantee employees, and certain D.C. government workers impacted by shutdowns lasting two weeks or more.
New Bill Offers Penalty-Free Retirement Withdrawals Up to $30K During Government Shutdowns
The Emergency Relief for Federal Contractors Act of 2025 is a straightforward piece of legislation designed to throw a temporary financial lifeline to people caught in the crossfire of a federal appropriations lapse—better known as a government shutdown.
The Emergency Cash Valve
Here’s the core of the bill: If the government shuts down for at least two continuous weeks, certain affected individuals can pull up to $30,000 out of their retirement accounts (like 401(k)s or IRAs) without paying the standard 10% early withdrawal penalty (which usually applies if you're under 59.5 years old). This $30,000 cap is per tax year and will be adjusted for inflation starting in 2026. This isn't a permanent fix for the shutdown problem, but it’s a crucial emergency relief valve for people facing zero income.
Who Qualifies for the Relief?
This isn't just for federal employees. The bill defines “applicable individuals” broadly to cover those who often get squeezed the hardest: federal contractors and their employees who are furloughed or working without pay; employees of federal grantees or state agencies whose pay is mostly federal and who face a pay cut; and employees of the D.C. court system or government who are furloughed. Essentially, if your paycheck is tied to federal funding and that funding stops for 14 days or more, you qualify for this special distribution rule.
The Three-Year Safety Net
If you have to tap into your savings, the bill gives you a generous safety net. First, you have a three-year window to pay the money back into an eligible retirement account. If you repay it within that time, the IRS treats the whole transaction as a tax-free rollover—meaning your retirement savings are made whole, and you avoid the tax bill. Second, if you don't or can't repay the withdrawal, you don't have to claim the entire amount as taxable income in the year you took it out. You can spread that tax liability evenly over three tax years, softening the blow of an otherwise massive tax bill.
The Trade-Off: Liquidity vs. Long-Term Security
This bill solves an immediate problem: how to pay the mortgage when your paycheck is MIA. For a federal contractor employee, this means they can access funds to cover essentials without the immediate 10% penalty, which is a massive win during a financial crisis. However, dipping into retirement savings, even penalty-free, is always a last resort. If you withdraw the money and fail to repay it within the three-year window, you still owe the income tax on that amount. For someone who took out the full $30,000, that could mean an unexpected several thousand dollars added to their tax bill spread over the next three years, even if they desperately needed the money during the shutdown. The bill provides flexibility, but the long-term goal of retirement security still takes a hit every time these emergency funds are used.