Retirement Plan Withdrawals for
COVID-19 Related Expenditures Expanded

COVID-19 Business Update

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 January 1 and December 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. Individuals 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 December 31, 2020, and the dollar limit on loans made between March 27 and September 22, 2020, is raised from $50,000 to $100,000.

Recently issued legislation expands the definition of who is considered to be a qualified individual to take into account additional factors. 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own or operate due to COVID-19; having pay or self-employment income reduced due to COVID-19; or having a job offer rescinded or start date for a job delayed due to COVID-19.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.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.