New guidelines for retirement loans and distributions due to COVID-19
On June 19, 2020, the Internal Revenue Service announced new guidelines to help those affected by COVID-19 gain more access to retirement plan distributions and loans. The IRS expanded the categories of those eligible, called qualified individuals, and increased the dollar limit on loans to $100,000.
The CARES Act
In late March of 2020, the $2 trillion Coronavirus Aid, Relief, and Economic Security Act – the CARES Act – was passed by Congress and signed by the President. In addition to providing direct assistance to individuals, families and small businesses, the CARES Act allows for COVID-19-related distributions of up to $100,000 from eligible retirement plans, including IRAs, between January 1st and December 30th of 2020. These distributions will not be subjected to the 10% early withdrawal penalty.
In addition, a COVID-19-related distribution can be included in income in equal installments over a three-year period and one has three years to repay and undo the tax consequence.
There are also provisions of the CARES Act that allow for retirement plans to relax rules for loan amounts and repayment terms, including the suspension of loan repayments that are due from March 27th through December 30th. Further, dollar amount on loans made between March 27th and September 22nd is increased to $100,000, up from $50,000.
Expanding the Qualification Criteria
The definition of those who qualify under the CARES Act was also expanded by the IRS. As copied directly from Notice 2020-50, a qualified individual is anyone who:
- Is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, "COVID-19") by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
- Experiences adverse financial consequences as a result of the individual, the individual's spouse, or a member of the individual's household (that is, someone who shares the individual's principal residence):
- being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
- being unable to work due to lack of childcare due to COVID-19;
- closing or reducing hours of a business that they own or operate due to COVID-19;
- having pay or self-employment income reduced due to COVID-19; or
- having a job offer rescinded or start date for a job delayed due to COVID-19.
The IRS makes it clear that employers can decide whether or not to implement these new rules, so don’t assume your employer will implement. That being said, even if your employer does not allow, an individual can still claim the tax benefits of the new rules, so long as they qualify.
What Should You Do?
Taxes are complicated enough, and the CARES Act spans more than 300 pages. Layer on the latest notice from the IRS (as well as previous notices), and reading, learning and implementing tax strategies that are most appropriate for you can be a daunting task.
Instead, consider the following:
- Reading about tax relief and other COVID-19 rules that impact your federal taxes on the “Coronavirus Tax Relief” pages of the IRS website (irs.gov); and
- Consulting your tax professional for guidance, especially with respect to whether or not you qualify.
Finally, make sure you talk to your financial advisor in order to confirm that the tax decisions you make are consistent with your overall financial plan.
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