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IRS Expands Who May Get COVID-19 Retirement Distributions

By Amy Lee Rosen · June 19, 2020, 6:32 PM EDT

The IRS on Friday issued guidance on a recent coronavirus pandemic relief law that expands who may take advantage of retirement plan distributions before age 59-and-a-half without being hit with a 10% tax that otherwise applies to early withdrawals.

Under the guidance, people with a reduction in pay or self-employment income or who had a job's start date delayed or rescinded due to COVID-19 can qualify to take an early retirement plan withdrawal, the Internal Revenue Service said. In addition, a person may take coronavirus-related retirement distributions if their spouse has been quarantined, furloughed, laid off, had work hours or pay reduced due to COVID-19 or had a job offer rescinded or job start date delayed, the government said.

Previously, those who could take early retirement distributions without penalty included only those who certified that a person or their spouse was diagnosed with COVID-19, the IRS said. But the individual also had to have experienced financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced or being unable to work due to lack of child care due to COVID-19, or the person had to show consequences as a result of closing or reducing the hours of a business they owned due to COVID-19.

The guidance will help retirement plan participants affected by COVID-19 take advantage of new provisions that provide enhanced access to plan distributions and plan loans, the government said. This includes expanding the categories of individuals eligible for these types of distributions and loans and providing guidance and examples on how qualified individuals will reflect the tax treatment of these distributions and loans on their federal income tax filings.

The Coronavirus Aid, Relief and Economic Security Act , signed in March by President Donald Trump, allows penalty-free withdrawals from retirement plans for up to $100,000 in distributions made between Jan. 1 and Dec. 30, 2020. A coronavirus-related distribution is not subject to the 10% tax that would otherwise apply if the person were under age 59-and-a-half.

The coronavirus-related distribution can be included ratably in income in equal installments over three years, and individuals may choose to repay the distributions over three years to undo the tax consequences of the coronavirus distribution, the IRS said.

The CARES Act also relaxed rules for terms related to loan amounts and repayments such that retirement plans can suspend loan repayments due from March 27 to December 2020, the IRS said. The statute also raised the dollar limit on loans to $100,000 from $50,000.

Friday's notice also provides a safe harbor for employers that decide to suspend loan repayments, the IRS said. Under the notice an employer may decide whether to implement the coronavirus-related distribution and loan rules, but people can still claim these distributions even if a retirement's plan provisions are not changed. Administrators of these retirement plans can rely on an individual's certification that they qualify for coronavirus-related distributions, the IRS said.

Eileen Sherr, a senior manager of tax policy and advocacy at the American Institute of Certified Public Accountants, told Law360 the AICPA is pleased the IRS issued guidance on the issue, which had been raised in a letter the organization recently sent to the IRS.

"The guidance adopted our requested guidance that beneficiaries are allowed to take the coronavirus-related distributions," Sherr said. "IRS also provided flexibility on other provisions."

The IRS did not immediately respond to questions from Law360.

--Editing by Vincent Sherry. 

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