Coronavirus-Related Retirement Account Distributions: Do Your Clients Qualify?
The newly enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act is designed to assist Americans affected by the COVID-19 outbreak. The legislation, in part, grants a provision allowing retirement savers to access their IRA and qualified retirement plan assets (e.g., 401(k) plans, 403(a) plans, governmental 403(b) plans, and Traditional IRAs) via a coronavirus-related distribution (CRD). Such distributions typically would be inaccessible or subject to early withdrawal penalties.
Eligibility for Coronavirus-Related Distributions
Individuals may withdraw up to $100,000 in aggregate from eligible retirement plans without paying the 10% early distribution penalty tax (that generally applies to early distributions for individuals under 59½ years old).
A CRD is defined as a distribution made during the 2020 calendar year to a qualified individual, defined as:
• an individual who is diagnosed with the coronavirus in an approved test;
• the spouse or dependent of an individual who is diagnosed with the coronavirus in an approved test; or
• an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reduced hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.
Eligible employees are required to sign a certification of the reason for the CRD, but employers are not required to verify such certifications.
Additional CRD Clarification
Additionally, the act provides clarification on the following:
• CRDs will meet the retirement plan distribution requirements, as long as all distributions from one employer do not exceed $100,000.
• Individuals may repay CRDs over three years beginning with the day following the day a CRD is made without having the amount recognized as income for tax purposes.
• Repayments may be made to an eligible retirement plan or IRA.
• CRD repayments made within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
• CRDs will be taxed ratably over a three-year period unless an individual chooses otherwise.
• Although CRDs may be rolled over, they are not considered “eligible rollover distributions” for certain purposes. Employers are not required to offer a direct rollover option.
• CRDs are exempt from the 20% mandatory withholding that normally applies to certain retirement plan distributions. Employers are also not required to provide a 402(f) notice.
Consult with Your Tax Advisor
For many Americans, the economic impacts of the coronavirus pandemic are forcing them to make tough financial decisions but accessing funds set aside for retirement can have significant impacts on your long-term financial goals. If you are considering taking a CRD, first consult with your tax advisor to safeguard your short-term and long-term financial health.
Download and print our Coronavirus-Related Distribution Infographic here.