- The CARES Act provides special tax treatment for retirement plan distributions for qualified individuals impacted by COVID-19.
- IRS Notice 2020-50 expands the definition of “qualified individuals.”
- The tax benefits of COVID-19 distribution rules may be used by qualified individuals — even if plan sponsors do not adopt the provisions.
- CLA’s financial and retirement plan advisors can answer your questions and help you keep your qualified retirement plan in compliance.
Have more questions about your retirement plan?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted on March 27, 2020, expanding provisions relating to participant distributions and loans from eligible retirement plans. The plans included are:
- IRAs under Section 408(a) or (b)
- Qualified retirement plans under Section 401(a)
- Annuity plans under Section 403(a)
- Section 403(b) plans
- Governmental deferred compensation plans under Section 457(b)
On June 19, 2020, the IRS issued Notice 2020-50 to expand the eligibility criteria for COVID-19 retirement plan distributions and loans, and to clarify the rules for reporting these transactions on federal income tax returns. Here’s a rundown of how you might be affected.
Tax treatment of coronavirus-related distributions
As noted in CLA’s recent article “CARES Act Brings Temporary Changes to Retirement Plan Distributions,” the CARES Act provides for special tax treatment for a coronavirus-related distribution. Specifically, the CARES Act:
- Provides an exception to the 10% additional “early withdrawal” penalty tax (including the 25% additional tax on certain distributions from SIMPLE IRAs)
- Allows the distribution to be included in income ratably over three years (optional on the part of the plan participant — alternatively, the participant may choose to include the entire taxable portion of a COVID-19 distribution in the year of distribution)
- Provides that the distribution be treated as a direct rollover if it is “rollover-eligible” and recontributed to an eligible retirement plan within three years
- Extends loan repayment suspension to the end of 2020
Who are qualified individuals?
Under the CARES Act, a qualified individual is anybody who:
- Is diagnosed with SARS-CoV-2 or with COVID-19 (as a result of certain tests)
- Has a spouse or dependent diagnosed with COVID-19 (as a result of certain tests)
- Experiences adverse financial consequences as a result of COVID-19 due to:
- Quarantine, work furlough or lay off, or reduction of work hours
- Inability to work due to lack of childcare
- Close or reduction of hours of a business owned or operated by the individual
Notice 2020-50 expands the category of qualified individuals to include individuals who:
- Experience a reduction in pay or self-employment income due to COVID-19
- Have a job offer rescinded due to COVID-19
- Encounter a delay in start date of a new job due to COVID-19
- Have a spouse or other household member who suffers adverse financial impacts of COVID-19 (resulting from furlough, quarantine, lay off, reduction of hours, childcare difficulties, pay reduction, job offer rescission or start date for a new job delayed) or whose business has closed, or whose hours of business have been reduced
Note that employers have discretion to allow or to not allow coronavirus-related distributions and loans. In addition, an employer may choose to allow COVID-19 distributions but not COVID-19 loans, and vice versa. Generally, plan amendments must be adopted by the last day of the first plan year beginning on or after January 1, 2022.
Review additional notes on COVID-19 retirement plan distributions
- The tax benefits of COVID-19 distribution rules may be used by qualified individuals — even if plan sponsors do not adopt the provisions. However, individuals who do not meet the “qualified individual” criteria may not take advantage of the favorable tax treatment.
- The CARES Act does not limit COVID-19 distributions (up to $100,000) to amounts withdrawn solely to meet the need arising from COVID-19.
- Plan sponsors may rely on an individual’s certification that he/she is a qualified individual. The certification is the responsibility of the plan participant, not the plan sponsor. This new notice contains self-certification language.
- Under the CARES Act, suspension of loan repayments ended six months from the CARES Act enactment deadline. This loan repayment suspension has now been extended through the end of 2020, by way of Notice 2020-50.
How we can help
At CLA, our teams stay abreast of plan changes so we can advise our clients accordingly. If you have questions about how to operate under the CARES Act legislation or whether these distributions are a strategic financial move for you, our third party administration team, along with CLA’s financial advisors, are able to answer your questions and help you keep your qualified retirement plan in compliance.
Securities products, merger and acquisition services, and wealth advisory services are provided by CliftonLarsonAllen Wealth Advisors LLC, a federally registered investment advisor and member FINRA, SIPC.