IRS Releases Guidance on CARES Act Retirement Plan Distributions
On June 19, 2020, the IRS released long-anticipated guidance on the retirement plan distributions which were authorized in light of the COVID-19 pandemic under the CARES Act. (For more information related to the retirement plan distributions authorized by the CARES Act, click here and here). Most significantly, the guidance expands the number of individuals eligible for coronavirus-related distributions.
As background, the CARES Act waives the 10% early withdrawal tax penalty on certain “coronavirus-related” withdrawals of up to $100,000 per year from retirement plans and individual retirement accounts, permits employees to spread the tax burden of these withdrawals over three years, and allows employees to repay any distribution amount to the plan to avoid the tax burden altogether.
The CARES Act includes (and the IRS confirmed in its May 4 FAQ guidance) a narrow definition of “coronavirus-related” distributions. Specifically, a coronavirus-related distribution may only be made to a “qualified individual,” defined as an individual who:
- Is diagnosed with the virus by a test approved by the Centers for Disease Control and Prevention (“CDC”);
- Has a spouse or dependent who is diagnosed with the virus by a test approved by the CDC; or
- Experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, has a reduction in hours, is unable to work because of lack of child care due to the virus, or is forced to close or reduce hours of a business they own or operate due to the virus.
The foregoing definitions would not permit an individual to take a coronavirus-related distribution if the individual experienced adverse financial consequences as a result of an employee’s spouse being furloughed, laid off, having a reduction in hours, being unable to work because of lack of child care, or being forced to close or reduce hours or a business the spouse owns or operates due to the virus. Fortunately, this new IRS guidance now expands the definition of a “qualified individual” to also include an individual who:
- Has a reduction in pay (or self-employment income) due to COVID-19 or has a job offer rescinded or start date for a job delayed due to the virus;
- Due to the virus, the individual’s spouse or a member of the individual’s household (defined as someone who shares the individual’s principal residence) is quarantined, furloughed, laid off, has work hours reduced, is unable to work due to lack of childcare, has a reduction in pay (or self-employment income), or has a job offer rescinded or start date for a job delayed; or
- Has a spouse or member of the individual’s household who is forced to close or reduce hours of a business owned or operated by the spouse or household member because of COVID-19.
Important note: to take advantage of the coronavirus-related distributions under the CARES Act (and this expanded eligibility granted by the IRS), retirement plans must be amended to permit these distributions. Coronavirus-related distributions may only be taken between January 1, 2020, and December 31, 2020, by a qualified individual, for no more than $100,000.