What the act says about coronavirus-related withdrawals
Frequently Asked Questions
If the plan has decided to make coronavirus-related withdrawals available, participant eligibility requirements are as follows:
- Participants who are diagnosed with COVID-19 via a CDC-approved test, or who have a spouse or dependent child diagnosed with COVID-19; or participants who experience adverse financial consequences as a result of:
- The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
- The individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of child care due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
- Other factors as determined by the Secretary of the Treasury or his delegate.
In this context, a “member of the individual’s household” is someone who shares the individual’s principal residence.
If the plan has decided to make coronavirus-related withdrawals available, participants may take up to an aggregate of $100,000 in coronavirus-related withdrawals from eligible retirement plan accounts and IRAs without the 10% early withdrawal penalty or 20% mandatory withholding. The distribution can be made through December 30, 2020.
If the plan has decided to make coronavirus-related withdrawals available, the tax and penalty implications are as follows:
- The 10% early withdrawal penalty is waived.
- There is no 20% mandatory federal tax withholding required at the time of distribution.
- Withdrawals will be taxed based on whether the participant originally contributed money to their account before or after paying taxes on it. With a pretax account, the participant’s contributions, any employer contribution and match, and earnings are taxable. For after-tax accounts, they already paid taxes on contributions, so only earnings are taxable.
- The participants can spread their tax obligation over three (3) years unless they elect immediate taxation.
Remember to remind participants to speak with their financial advisor and/or tax consultant.
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