The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, provided economic assistance to Americans experiencing financial hardships from the COVID-19 outbreak.
Among its stipulations, the CARES Act temporarily waived the 10% additional tax and 20% federal tax withholding on early distributions from qualified retirement plans up to $100,000 and through December 31, 2020. The act also allows for claiming the distribution as income on tax returns in three equal installments over three years, effectively minimizing the tax consequences of the distribution.
Additionally, rules for retirement account loan repayments may be relaxed for qualified individuals, including suspending repayments due through December 31, 2020.
Who Is Eligible for the Retirement Plan Provisions in the CARES Act?
There are certain requirements retirement account holders must meet in order to take advantage of the new early distribution and loan provisions under the CARES Act. Initially, the CARES Act defined eligible individuals as follows.
- An individual diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or
- Has a spouse or dependent diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or
- Has experienced financial hardship as a result of being quarantined, furloughed, or laid off, having a reduction in work hours, being unable to work due to lack of childcare related to COVID-19.
To provide clarification on the eased rules for early withdrawals, the IRS recently issued further guidance.
New Guidance Provides Expanded Definition of Qualified Individual
IRS Notice 2020-50, issued on June 19, expanded the definition of a qualified individual to include:
- An individual experiencing a reduction in pay (or self-employment income) due to COVID-19 or had a job offer rescinded or delay of a start date for a job due to COVID-19
- The individual’s spouse or a member of the household being quarantined, furloughed, laid off, or having hours reduced, the inability of work due to lack of childcare, having a reduction in pay, or a job offer rescinded, or start date for a job delayed, all due to COVID-19.
- The closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
A member of the household is defined as someone sharing the individual’s primary residence.
How Will This Affect Employers?
Employers with retirement plans may not be required to update their plans, but they will need to report qualified distributions and should be prepared to answer questions from employees regarding withdrawals from their retirement accounts under the CARES Act.
- Employers are not required to implement these new distribution and loan rules; however, qualified individuals can still claim the tax benefits regardless.
- Employees requesting a withdrawal from their retirement account will self-certify that they meet the requirements of a qualified individual.
- IRS Notice 2020-50 has guidance for employers and plan administrators on how to report coronavirus-related distributions.
IRS Notice 2020-50, June 19, 2020, irs.gov
IRS Issues Further Guidance on 401(k) Withdrawals, While Participants Hold Steady, July 10, 2020, shrm.org