On Friday, June 19, 2020, the Internal Revenue Service (IRS) issued IRS Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans From Retirement Plans Under the CARES Act for COVID-19-related 401(k) and Individual Retirement Account (IRA) loans and distributions. Notably, the guidance expands the list of individuals who qualify for special tax relief.

When it comes to utilizing retirement funds for COVID-19-related financial relief, there’s a growing demand. A popular retirement fund distribution organization recently found 1.2% of its 401(k) plan participants withdrew a Coronavirus Aid, Relief, and Economic Security (CARES) Act distribution in May. On average, distributions were around $12,500, but more than 6,000 individuals took the full $100,000 (the total amount able to be withdrawn under the CARES Act in calendar year 2020). Health care and manufacturing workers were the leading demographic to utilize these CARES Act distributions.

Favorable Retirement Withdrawal Opportunities

While the CARES Act allows for a maximum $100,000 distribution, the 10% early withdrawal penalty is waived for individuals under 59½ years old. You would still owe income tax on the withdrawn money, but the taxes can be paid back over three years. If your financial circumstances improve, the CARES Act offers you the ability to redeposit the withdrawn funds into your retirement account(s) within three years as a rollover contribution. Moreover, if you repay the money into the account within the three-year period, you can avoid the tax altogether.

The CARES Act also increased the amount individuals can borrow from their 401(k) accounts. Now through Sep. 22, 2020, you can borrow up to 100% of your 401(k) balance (up to $100,000, not including outstanding loans). Historically, the maximum amount you could borrow was $50,000, so this provides a great deal of relief for qualifying account holders. In addition, outstanding loans with payments due through Dec. 31, 2020 can now be delayed up to a year.

Are You Eligible?

This new guidance from the IRS reiterates not just anyone can tap into their 401(k) or IRA fund – you must be qualified. Notice 2020-50 defines a qualified individual as anyone who:

  • Has been diagnosed with the COVID-19 virus (specifically by a test approved by the Centers for Disease Control (CDC)
  • Has a spouse or dependent who has been diagnosed with the COVID-19 virus
  • Experiences unfavorable financial circumstances (as well as their spouse or anyone else who shares the individual’s primary residence) due to:
    • Being quarantined (and therefore unable to work), laid off, furloughed or having reduced work hours due to COVID-19
    • Being unable to work due to dependents’ school/childcare closing as a result of COVID-19
    • Reduced pay or self-employment income due to COVID-19
    • A revoked job offer or start date due to COVID-19

Additionally, the rules now allow for still-employed spouses with retirement accounts to take COVID-19-related distributions of up to $100,000 from their own accounts to make up for lost income. This is primarily significant, as many Americans have been put in a situation where their spouse was put out of work and didn’t have substantial retirement account assets.

Employer Guidance

Ultimately, it comes down to employers choosing whether or not to implement this new guidance. Fortunately, most employers are choosing to do so to benefit their employees who are struggling financially. If for whatever reason your employer chooses not to adopt the new guidance, you are still able to claim the tax benefits when filing your tax returns. If you have further questions, the full 19-page formal guidance is available on the IRS’s website.

As with most of the new COVID-19 regulations, this new retirement plan distribution guidance is not cut and dry for employers. To help, the formal guidance contains a sample letter which only requires an employee’s signature to ensure they’re eligible for a coronavirus-related distribution. There are also detailed examples of tax treatment for retirement plan distributions and recontributions throughout the document and a safe harbor rule for loan deferrals.

Plan Sponsors

The new guidance also provides information to plan sponsors for reporting any recontributed COVID-19-related distributions. The new reporting rules include:

  • Plans must use Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, etc.) to report repaid amounts, even when amounts are repaid within the same year to the same eligible retirement plan. Section 4(A) of the notice discusses distribution codes for Form 1099-R.
  • Participants can recontribute distributions to any plans accepting rollover distributions in the normal course and reasonably concluding the amount is eligible for direct rollover treatment. Receiving plans may depend on an individual’s certificate as needed if there is not additional information available.
  • Individuals can report COVID-19-related distributions on 2020 federal income tax returns and on Form 8915-E (anticipated to be available by the end of the year), or if a federal income tax form is not required, on Form 8915-E.
  • Recontributions of COVID-19-related distributions within the three-year period do not count for purposes of the one-rollover-per-year limit.
  • Recontributions throughout the three-year period reduce the amount of COVD-19-related distributions included in the distribution year’s gross income, as reported on Form 8015-E.

 Weigh Your Options

It’s imperative to note that while utilizing retirement funds to support yourself and your family during the COVID-19 pandemic may be a helpful immediate option, you’re taking away your own money and will still need to pay the taxes. For assistance on deciding whether or not to apply your retirement funds toward COVID-19 financial relief, contact Doeren Mayhew’s tax advisors today.