Permitted COVID-19 Related Distributions from Retirement Plans under CARES Act
Author:
Joyce M. Hillis, Esq.
May 6, 2020
In an effort to provide additional financial relief, Section 222 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, as signed into law by President Trump on March 27, 2020, contains provisions expanding distribution and loan options for eligible retirement plans. The IRS has recently published additional insight on Section 222 on their website in the form of a questions and answers section. Please note that it is optional for an employer to implement the expanded distribution and loan rules discussed in this article. If you are an employee, you must confirm that your employer has properly amended its plan to satisfy the provisions of Section 222 of the Cares Act before relying on the distribution and loan options discussed below. If you are an employer and would like to implement these changes, please reach out to your advisor to amend your plan agreement.
Section 222 provides that qualified individuals may withdraw up to $100,000 of coronavirus related distributions from certain retirement plans, including IRAs and 401(k) and 403(b) plans, and not be subject to the 10% additional tax imposed on distributions from retirement plans before an individual reaches age 59 ½.
A qualified individual is defined as a person who: (i) is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; (ii) has a spouse or dependent that is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; (iii) experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; (iv) experiences adverse financial consequences as a result of being unable to work due to lack of child care due to COVID-19; or (v) experiences adverse financial consequences as a result of closing or reducing hours of a business that one owns or operates due COVID-19.
If you are a qualified individual and elect to take a coronavirus related distribution, you have the option to either repay the amount withdrawn within three years or, if not, you will need to pay the federal income tax on the distribution. You may also choose to repay a portion of the distribution and be subject to tax on only the amount not repaid. A coronavirus related distribution must be reported on your federal income tax return for 2020 and you may elect to pay the income tax over the next three year period. If you repay all or a portion of the distribution, you may later amend your returns and request a refund of any tax paid.
In addition, Section 222 provides that the repayment of certain loans taken from a retirement plan before March 27, 2020 may be delayed up to one year. Loan payments due between March 27, 2020 and December 31, 2020 may be deferred up to a year. Again, you must confirm that your plan administer has amended its plan to allow delayed loan repayment.
The Treasury Department is in the process of drafting additional guidance, and we will provide further updates when such guidance is released.
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