The coronavirus pandemic has changed the American economy in profound ways and the government has reacted swiftly, providing stimulus funds and putting special rules in place to aid those who are struggling. Some of those special rules apply to withdrawals and distributions from retirement plans -- but they can be confusing.
To ensure people who need to tap into their retirement accounts understand what their options are, the IRS recently released some answers to frequently asked questions about coronavirus-related relief for retirement plans. Here are some of the key things they want you to know.
1. The CARES Act includes special rules for retirement plan withdrawals
First things first: The Coronavirus Aid, Relief, and Economic Security (CARESS) Act changed the rules for coronavirus-related distributions from 401(k), 403(b), and IRAs. Under these special rules:
- Qualified individuals can withdraw up to $100,000 without owing the 10% penalty normally due on withdrawals before age 59 1/2. The $100,000 limit is an aggregate limit applicable to all accounts, including 401(k) and IRA plans.
- Distributions you take can be repaid over three years with no impact on future contributions (this was not previously allowed). The repayment will be treated as rollover contributions.
- Ordinary income tax due on withdrawals can be repaid over three years, when customarily it must be repaid in the year the funds are withdrawn.
These rules apply only to coronavirus-related distributions, which have been defined by the IRS as "distributions made from an eligible retirement plan to a qualified individual." To count as a coronavirus-related distribution, the money must be withdrawn from an eligible retirement plan between Jan. 1, 2020 and Dec. 31, 2020.
2. There are also special rules in the CARES Act for 401(k) and 403(b) loans
The CARES Act also changes the rules for loans from eligible retirement plans, including 401(k) and 403(b) plans. The new rules:
- Allow you to borrow as much as 100% of your vested account balance up to a maximum loan amount of $100,000. The prior limit was the lesser of 50% of your vested account balance or $50,000.
- Gives you an extra year to repay the borrowed amount, so you can now pay yourself back over six years instead of five. The extended one-year repayment period applies to loans outstanding on or after March 27, 2020 with payments due between March 27, 2020 and Dec. 31, 2020.
3. You have to be a qualified individual to take advantage of these new rules
The CARES Act relaxed the rules only for "qualified individuals," so not everyone can benefit from the new policies. To be considered a qualified individual, any one of the following must be true:
- You, your spouse, or a dependent was diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention.
- You experienced adverse financial consequences due to being quarantined, furloughed, laid off, or having your hours cut due to the novel coronavirus.
- You experienced adverse financial consequences because you lost your child care due to COVID-19 and could not work because of it.
- COVID-19 caused you to close your business or reduce hours at a business you own and you experienced financial consequences because of it.
4. Employers don't have to adopt the new rules
While the CARES Act enables these rule changes, it doesn't require companies to adopt them. That means employers can choose whether or not to amend 401(k) or 403(b) plan to allow for coronavirus-related distributions or loans.
Employers can also choose whether or not to accept repayment of coronavirus-related distributions. While the IRS anticipates most plans will, those that don't accept rollover contributions will not have to change their policies to allow repayment.
5. You'll have to designate your distribution as coronavirus-related on your tax return
If you meet the definition of a qualified individual, you can designate a distribution of up to $100,000 as a coronavirus-related distribution.
You'll need to file IRS Form 8915-E to report coronavirus-related distributions, regardless of whether or not you're required to file a tax return. And when you declare the income from your distribution, you can choose between paying the entire amount of taxes due on it in 2020 or can prorate the payment of taxes on it in 2020, 2021, and 2022.
Any distribution you take will also be reported by the retirement plan on Form 1099-R. Your plan has to file this form with the IRS even if you repay the entire distribution in the year you took it.
Make sure you follow the rules for coronavirus relief from retirement plans
Distributions and withdrawals from retirement plans should be avoided as much as possible -- but if you need to tap into your retirement accounts, make sure you understand these rules the IRS wants you to know so you can benefit from the relief the CARES Act has provided.