On March 27, 2020, in response to the COVID-19 global pandemic, Congress passed the Coronavirus, Aid, Relief, and Economic Security (CARES) Act (also known as HR 748). This is historic and sweeping legislation created to help keep workers paid and employed, allow businesses to remain operational, make necessary health care system enhancements and stabilize the economy.
The Act contains a few key provisions designed to assist retirement plan participants who are struggling financially during these unprecedented times. Here is a quick summary of these key provisions:
Hardship Distributions
The CARES Act waives the Code Section 72(t) additional 10% penalty tax on early (pre-age 59 ½) withdrawals up to $100,000 from a retirement plan or IRA for an individual who:
- Is diagnosed with COVID-19
- Whose spouse or dependent is diagnosed with COVID-19
- Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, other factors as determined by the Treasury Secretary.
A coronavirus-related distribution under the Act can be included proportionally in the qualified individual’s taxable income over a three-year period, unless the individual elects to have it taxed in the year of distribution. In addition, the distribution will not be treated as eligible rollover distributions, so the mandatory 20% withholding does not apply.
The Act also allows a qualified individual who takes a coronavirus-related distribution to repay that amount tax-free back into the plan within three years of taking the distribution. Such repayment would be treated as a rollover contribution and not subject to annual maximum contribution limits.
If you have any questions, please contact me!