In a recent article referenced on AICPA.org, some important rule changes related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136 were outlined. The full article is available here, but below are some of the highlights.
Bear in mind that under normal conditions, withdrawals from qualified retirement plans are subject taxation in the year of withdrawal and additional penalties, see IRS rules for specifics.
Under the CARES Act, early withdrawals taken in 2020 due to COVID-19 hardships will not be subject to the 10% additional tax under Sec. 72(t) or the 25% additional tax on SIMPLE IRAs under Sec. 72(t)(6), if certain requirements are met.
1st Requirement – Qualified Individual
- In order to avoid the 10% penalty, the distribution must be made to a qualified individual from an eligible retirement plan between Jan. 1, 2020, and Dec. 31, 2020, and must be $100,000 or less in aggregate.
- A qualified individual is anyone who has been diagnosed with COVID-19 by a test approved by the CDC or has experienced adverse financial consequences due to being quarantined, furloughed, or laid off; having work hours or pay reduced; having been unable to work due to a lack of child care; having owned or operated a business that has been closed; having a reduction in self-employment income; or having a job offer rescinded or a start date delayed. An individual also qualifies if his or her spouse or a member of his or her direct household has experienced any of the above.
- A qualified individual is not required to demonstrate a true need for the funds in order to take advantage of this provision. As long as an individual has experienced adverse financial consequences for any of the reasons above, an early distribution is allowed. Similarly, distributions are not limited in amount to the extent of adverse financial consequences experienced. The burden of proof falls on individuals to certify that they qualify, and employers or plan administrators are not required to verify the information unless they have actual knowledge contrary to the individual’s certification.
2nd Requirement – Eligible Plan
- Eligible plans include an IRA, 401(k), 401(a), an annuity such as a 403(a) or 403(b), and a governmental deferred compensation plan such as a 457(b). Distributions from these plans are ordinarily included in a taxpayer’s gross income in the year of distribution and can ordinarily be directly rolled over.
3rd Requirement – Distribution in 2020
- The distribution must be made in the calendar year 2020,
4th Requirement – Distributions Can’t Exceed $100,000
- The aggregate distributions eligible for COVID-19 relief are not to exceed $100,000 per individual.
IMPORTANT: The CARES Act allows individuals to report distributions ratably over three years. This means that an individual who withdraws $30,000 in 2020 may report $10,000 of income in 2020, 2021, and 2022. A qualified individual may elect out of the three-year ratable income inclusion and instead include the entire amount in the year of the withdrawal. As always, consult your CPA or tax advisor.
References:
Source: Early distributions from retirement plans related to COVID-19 By Celeste Schimmenti, CPA, Denver November 1, 2020, published here.
IRS:
https://www.irs.gov/newsroom/early-withdrawals-from-retirement-plans