IRS expands relief for coronavirus-related retirement plan withdrawals
The Internal Revenue Service provided guidance Friday to taxpayers who are taking advantage of some provisions in the CARES Act that allow them to take out money from their retirement accounts to deal with the economic fallout of the COVID-19 pandemic.
With the Labor Department reporting Thursday that first-time unemployment claims amounted to 1.5 million last week, and with a total of 29.1 million workers receiving benefits, many people are turning to their retirement plans as a source of money to pay for current expenses. The CARES Act that Congress passed in late March includes provisions enabling people to take distributions or loans of up to $100,000 from an IRA, 401(k) or 403(b) plan and still get favorable tax treatment.
In Notice 2020-50, the IRS spelled out the details to help retirement plan participants affected by COVID-19 take advantage of these CARES Act provisions regarding retirement plan distributions and loans. That includes expanding the categories of individuals who are eligible and giving guidance and some examples of how that will reflect the tax treatment of the distributions and loans on qualified individuals’ federal income tax filings.
The CARES Act allows qualified individuals to treat as coronavirus-related distributions up to $100,000 in distributions from their eligible retirement plans (including IRAs) between Jan. 1 and Dec. 30, 2020. A coronavirus-related distribution isn’t subject to the 10 percent additional tax that would otherwise typically apply to distributions made before an individual reaches the age of 59-½. A coronavirus-related distribution can be included in income in equal installments over a three-year period. People have three years to repay a COVID-19-related distribution to a plan or IRA and undo the tax consequences of the distribution.
The CARES Act also says plans can implement certain relaxed rules for qualified individuals relating to plan loan amounts and repayment terms. Specifically, plans may suspend loan repayments that are due from March 27 through Dec. 31, 2020, and the dollar limit on loans made between March 27 and Sept. 22, 2020, is raised from $50,000 to $100,000.
As authorized under the CARES Act, Notice 2020-50 expands the definition of who is considered to be a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates, as well as adverse financial consequences to an individual arising from the impact of the coronavirus on their spouse or household member. As expanded under Notice 2020-50, a qualified individual is anyone who:
- Is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or,
- Experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence) being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19; being unable to work due to lack of childcare because of COVID-19; closing or reducing hours of a business that they own or operate due to COVID-19; having pay or self-employment income reduced due to COVID-19; or having a job offer rescinded or start date for a job delayed due to COVID-19.
Notice 2020-50 also clarifies that employers can decide whether to implement these COVID-related distribution and loan rules, and notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions aren’t changed. The guidance clarifies that administrators can rely on an individual’s certification that they’re a qualified individual (and includes a sample certification), but also points out that an individual actually needs to be a qualified individual to get favorable tax treatment.
The notice also gives employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes that there may be other reasonable ways to administer these rules.
Employers, financial institutions and individuals can refer to the notice for more information about how the CARES Act rules for COVID-related distributions and loans from retirement plans would apply.