I think to get a fixed timestep, you would just wrap your damping code in a loop and use a static variable to track the elapsed time. It would look something like this (desiredTimeStep would be whatever fixed duration you want):
static float elapsedTime = 0.0f;
elapsedTime += DeltaTime;
while (elapsedTime >= desiredTimeStep)
{
elapsedTime -= desiredTimeStep;
FVector initVel = component->GetPhysicsLinearVelocity();
FVector hInitVel = FVector(initVel.X, initVel.Y, 0);
component->SetPhysicsLinearVelocity(initVel - hInitVel * damping * desiredTimeStep);
}