Message Board › 100K 401k Distirbution due to Hardship
- This topic has 6 replies, 4 voices, and was last updated 8 months ago by Mark Bole.
October 8, 2020 at 1:47 pm #275384AnonymousParticipant
Client is 64 and is planning on taking a hardship distribution of $100k from his 401k. He is certifying with the trustee that it is a hardship (wife lost job due to corona) and w/d the $100k. Are the taxes assess on 1/3 of the distribution over 2020-2022 return (33,333 per year); and, if he repays of the 100k then the taxes paid are refunded to him (requiring amended return?).
What constitutes a hardship?
October 8, 2020 at 3:35 pm #275397Diane WhiteParticipant
Per IRS guidelines a hardship distribution is one made to an individual who themselves, spouse or dependent were diagnosed with either SRS-COV-2 or COVID-19 or anyone who experiences adverse financial conditions as a result of being quarantined, furloughed or had their job eliminated.
October 11, 2020 at 1:35 pm #275490Anonymous
Actually a better question is what constitutes “adverse financial conditions”.
October 11, 2020 at 4:41 pm #275493Mark BoleParticipant
As to the initial post first two questions, the answers are: yes, and yes.
“Actually a better question is what constitutes “adverse financial conditions [sic]”.”
It may be better, but it is not primary. We don’t get to that question until AFTER we determine the following:
“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,”
So first, you (or an immediate family member) have to have either been diagnosed with the disease, OR your (but NOT your family members!!) earned income capacity took a hit (but who is to say you weren’t going to cut down your work hours or retire anyway, decided before the new law took effect?). So for example, suppose your “adverse financial consequence” was a loss of market value in your stock investments? No good. Also, suppose all your income is from investments and retirement (Social Security, pensions, annuities). No good.
So unless you at minimum have a history of earned income prior to the COVID-19 impact, or your spouse/dependents were diagnosed, you are not eligible for this special treatment of distributions (but see following comments).
Just like one-property rentals claimed as trade/business for QBI purposes, the hardship distribution most likely won’t be challenged by the IRS, so take it if you want it IMO. The employers are allowed to take the employee’s word for it, so no due diligence there. The law also allows for the Secretary of the Treasury or delegate to make up other factors, so that remains to be seen what will be allowed, or what confusion taxpayers can claim as reasonable cause for not complying with the letter of the law.
October 11, 2020 at 4:54 pm #275494Mark BoleParticipant
NOTE: I don’t think this is legit. If his wife lost her job due to corona, that is HER hardship, and she can make a hardship distribution from HER retirement account(s). He cannot make a hardship distribution from HIS account based on her hardship.
“He is certifying with the trustee that it is a hardship (wife lost job due to corona)”
October 12, 2020 at 9:17 am #275504Sandy WeinerParticipant
See IRS Notice 2020-50 for expanded hardship criteria….spouse’s loss of job does qualify.
October 12, 2020 at 4:58 pm #275540Mark BoleParticipant
Thank you, I actually had downloaded that notice back in June when it was released but had not yet committed it to memory. It falls under what I noted above, “In addition, pursuant to the authority of the Secretary to issue guidance to provide for other factors under section 2202(a)(4)(A)(ii)(III) of the CARES Act, a qualified individual for purposes of this notice [blah blah]“. It is not what the law said, but what the secretary choose to add on.
The definition of the household includes just about anyone you know who has set foot in your house (“someone who shares the individual’s principal residence”). Note that it doesn’t say it has to be their principal residence. So, for example, I have an adult child, not a dependent, whose hours were cut back due to coronavirus, who occasionally drops by my house to visit, take a nap, etc. So, based on that alone, I can take out the CV distribution from my own retirement plan and use it for anything I want, even if I was not directly affected by CV.
Again, like I said above, ” the hardship distribution most likely won’t be challenged by the IRS, so take it if you want it IMO.” Unless they surprise us by including some due diligence questions on the tax return.