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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distributions were around $12,500, but more than 6,000 individuals took the full $100,000 (the total amount able to be withdrawn under the CARES Act in calendar year 2020).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.
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 You would still owe income tax on the withdrawn money, but the taxes can be paid back over three years. If your financial circumstances improve, the CARES Act offers you the ability to redeposit the withdrawn funds into your retirement account(s) within three years as a rollover contribution.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.
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:
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.
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.
The new guidance also provides information to plan sponsors for reporting any recontributed COVID-19-related distributions. The new reporting rules include:
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.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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