Updated: July 1, 2020
Dear Friends & Clients,
According to the Internal Revenue Service (“IRS”), anyone, including household family members, who have lost pay during the COVID-19 pandemic is now eligible for a retirement account payout without penalty.
Under the CARES Act, which was passed into law in March 2020, a “qualified individual” is permitted to withdraw payments of up to $100,000 from his or her retirement plan, with the IRS waiving the standard 10% early withdrawal penalty.
Originally, the federal government said that a “qualified individual” was:
- An individual, the individual’s spouse, or the individual’s dependent who has been diagnosed with COVID-19; or
- An individual who has experienced adverse financial consequences as a result of:
- being quarantined, being 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; or
- closing or reducing hours of a business owned or operated by the individual due to COVID-19.
However, the IRS has now issued updated guidance stating that anyone who has a household family member that has had a pay reduction or job loss of some kind is eligible for early distributions from his or her retirement plans.
The latest notice from the IRS has expanded the list of qualified individuals to include:
- A participant whose spouse or a member of his or her household has:
- experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours or pay reduced because of COVID-19;
- experienced COVID-19 related financial consequences as a result of being unable to work due to childcare unavailability; or
- has had a job offer rescinded or a new job’s start date delayed due to COVID-19 or has suffered a reduction in pay or self-employment income due to COVID-19.
- A participant who had a job offer rescinded or a new job’s start date delayed due to COVID-19.
For qualified individuals, the CARES Act includes financial assistance based on the following expanded access to retirement funds:
- The Act provides an opportunity to request a distribution of up to $100,000 under a qualified retirement plan and individual retirement account;
- The individual taking a distribution can spread the reported income over three years for tax purposes and any amounts distributed under these special rules may be repaid at any time over the three-year period commencing with the date of distribution to avoid taxation;
- The Act also provides that such a distribution will not be subject to the 10% additional tax for early distributions from a qualified retirement plan and individual retirement account (including the 25% additional tax for certain distributions from SIMPLE IRAs);
- A temporary increase of the plan loan limit to allow loans up to the lesser of the vested account balance under the plan or $100,000 for loans requested during the 180-day period following the signing of the Act; and
- A one-year delay for any plan loan repayment due on or before December 31. Under this new guidance, there is also now a safe harbor that plan sponsors can now follow for the administration of the delay in loan repayments due through the end of 2020. The safe harbor provides that the term of the loan may be extended for up to one year from the date the loan was originally due to be repaid.
Lastly, the IRS has provided clarification that employers can rely on the employee certifications of qualified individual status unless the employer possesses actual knowledge to the contrary. This means that the employer is not required to undertake any inquiry or investigation to verify the information provided by the employee.
NOTE: Be sure to consult your personal tax advisor before making a withdrawal.
If you have any questions about these issues and the new deadlines, please contact the attorneys of Unruh, Turner, Burke & Frees, P.C.
Wishing you the best,
David Frees and Douglas Kaune