To help individuals withstand the financial challenges of the COVID-19 pandemic, the CARES Act allows individuals impacted by the pandemic to take up to $100,000 of coronavirus-related distributions from qualified retirement plans and IRA’s without being subject to the taxes and penalties which would otherwise be due.
Taxes on the distribution can be paid over three years or avoided altogether if the money is returned to the plan within three years. The Act also allows an individual to borrow up to $100,000 (increased from $50,000) from a qualified retirement plan until September 22, 2020. These and other provisions of the Act are detailed in PRESIDENT SIGNS CORONAVIRUS STIMULUS LEGISLATION.
Under the Act, a coronavirus-related distribution is one made during 2020 to an individual:
• who is diagnosed with COVID-19 by a CDC approved test;
• whose spouse or dependent is diagnosed with COVID-19; or
• who experiences adverse economic consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of childcare.
The IRS, in Notice 2020-50, expanded the eligibility for these distributions and loans by including individuals who experience adverse financial consequences as a result of:
• having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
• the individual’s spouse or a member of the individual’s household (sharing the 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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
• 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.
Plan administrators may rely on the employee’s certification that the employee meets one of the above conditions in the absence of actual knowledge to the contrary. The Notice’s model certification can be found at pages 9 and 10 of the Notice.
Employers can choose whether to amend their qualified plans to implement these coronavirus-related distribution and loan rules. However, eligible individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions are not amended.
Issues concerning eligibility under various provisions of the CARES Act are nuanced and evolving. If you have any questions regarding eligibility under IRS Notice 2020-50, other issues related to the COVID-19 pandemic, or any other legal issue, please contact your FOS attorney.