Retirement Planning

Coronavirus-related Retirement Plan Distributions

Typically, a distribution from a qualified retirement plan is subject to a 10% tax penalty unless the distribution meets any of the following exceptions. Generally, distributions are exempt from the 10% penalty if the distributions are:

  • made on or after the date on which the employee attained age 59½,
  • made to a beneficiary (or to the estate of the employee) on or after the death of the employee,
  • attributable to the employee’s being disabled,
  • part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary,
  • made to an employee after separation from service after attainment of age 55,
  • dividends paid with respect to stock of a corporation which are described in section 404(k).

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides that the 10% penalty does not apply to any Coronavirus-related distribution, up to $100,000. A Coronavirus-related distribution is any distribution made on or after January 1, 2020 and before December 31, 2020 from an eligible retirement plan made to a qualified individual.

A qualified individual is defined as an individual:

  • who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC),
  • whose spouse or dependent is diagnosed with such virus or disease by such a test, or
  • who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

In addition to waiving the 10% tax penalty on qualified Coronavirus-related distributions, the CARES Act provides that taxable amount of the distribution can be spread ratably over the next three tax years. The distribution may also be contributed back to the plan at any time during the three-year period beginning the day after the initial distribution. The aggregate amount of contributions back to the plan cannot exceed the total amount of the distribution. If you pay tax on the distribution then contribute it back to the retirement plan, you can get the prior taxes paid refunded by filing an amended tax return.

Prior to making a retirement plan distribution, we recommend you consult with your tax and financial advisor regarding your specific situation.

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