The CARES Act implements new types of “coronavirus-related distributions” from retirement plans, including 401(k), 403(b), 457(b), and employee stock ownership plans, as well as individual retirement accounts (IRAs). These distributions are not subject to the 10% early withdrawal penalty that would otherwise apply to early distributions from these types of plans, nor are they subject to withholding requirements that are generally imposed on distributions.
The aforementioned distributions may be made between January 1, 2020, and December 31, 2020, to: – Individuals who are diagnosed with SARS-CoV-2 or Covid-19,- Individuals whose spouse or dependent is diagnosed with the virus or disease, or – Any individual who experiences adverse financial consequences resulting from quarantine, furlough, being laid off, a reduction in work hours, or being unable to work because of a lack of child care. Importantly, a plan administrator may rely on the employee’s certification that the employee meets one of these conditions for eligibility for CARES distributions.
Such distributions are limited to the lesser of $100,000 or 100% of the participant’s account balance. The CARES Act allows distributions to be repaid, without interest, within the three-year period starting the day after the participant receives the CARES distribution. Repayment may be made either to the qualified retirement plan or IRA from which distributions were made or to a new 401k, other qualified retirement plan, or IRA. If the distribution is repaid within the three-year period, it is treated, for income tax purposes, as if the repayment was a direct trustee-to-trustee transfer made within sixty days of the distribution.
If not repaid, the distributions are subject to income tax. For income tax purposes, the distributions can be reported by the participant ratably over a three-year period instead of in a single lump sum, which could result in a lower income tax rate applying to the distributions. Plan sponsors and administrators should be take care with their record keeping in connection with such distributions and repayments under the CARES Act, as well as with the related reporting to the IRS.
As always, please contact your MSPC advisor or MSPC’s COVID-19 Task Force should you need any assistance with these issues.