April 23, 2020
Stephen A. Sherman
Of Counsel, Stoll Keenon Ogden PLLC
Generally, an early distribution from a qualified retirement plan is subject to a 10% additional tax unless the distribution meets a statutory exception (IRC § 72(t)). The CARES Act provides a new statutory exception to the 10% additional tax. The tax does not apply to any coronavirus-related distribution, up to $100,000. (CARES Act § 2202(a)(1)).
A. The New Exception
The new exception applies to “coronavirus-related distributions” made to a “qualified individual”.
A “coronavirus-related distribution” is any distribution, made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan (including a 401(k) or IRA, among others) made to a qualified individual. (CARES Act § 2202(a)(4)(A))
A “qualified individual” is an individual who meets one of three qualifications:
1. diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the CDC,
2. has a spouse or dependent is diagnosed with either virus or disease by such a test, or
3. experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the virus or disease, being unable to work due to lack of child care due to the virus or disease, closing or reducing hours of a business owned or operated by the individual due to the virus or disease, or other factors as determined by the Secretary of the Treasury. (CARES Act § 2202(a)(4)(A)(ii))
As stated above, the total amount of distributions which may be treated as coronavirus-related distributions by an individual for any tax year cannot exceed $100,000. (CARES Act § 2202(a)(2)(A)).
The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions of third qualification above that a distribution is a coronavirus-related distribution. (CARES Act § 2202(a)(4)(B))
If a distribution to an individual would (without regard to the $100,000 limit) be a coronavirus-related distribution, a plan is not treated as violating the Internal Revenue Code merely because the plan treats such distribution as a coronavirus-related distribution, unless the total amount of such distributions from all plans maintained by the employer and any member of any controlled group which includes the employer to such individual exceeds $100,000. (CARES Act § 2202(a)(2)(B))
B. Recontribution of Distribution
If an individual receives a coronavirus-related distribution, at any time during the 3-year period beginning on the day the distribution was received they may make one or more contributions in an amount totaling up to the amount of the distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under the Internal Revenue Code. (CARES Act § 2202(a)(3)(A)). The treatment of such a contribution differs depending upon whether the distribution was from an individual retirement plan or another type of qualifying plan. (CARES Act § 2202(a)(3)(B) and (C))
C. Spreading of Taxes
In the case of any coronavirus-related distribution, unless the taxpayer elects not to, any amount required to be included in gross income for the tax year will be included ratably over 3 tax years beginning with the tax year in which the distribution was made. (CARES Act § 2202(a)(5)(A))
Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for over 120 years.
Our firm’s Tax practice advises businesses and individuals on all aspects of local, state and federal taxation, including tax planning, audits, administrative hearings and trials.
Please also be sure to consult the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.