The CARES Act provided taxpayers with the option to take penalty-free coronavirus-related withdrawals of retirement funds of up to $100,000 in the aggregate between January 1, 2020, and December 31, 2020. However, not all taxpayers qualify to take these penalty-free distributions.
To qualify for the penalty relief, taxpayers must be able to demonstrate a reason for the distribution related to the pandemic. The CARES Act provided a list of qualifying factors, and stated that other factors would be determined by the Secretary of the Treasury.
IRS Notice 2020-50 provides us with those additional factors provided by the Secretary of the Treasury.
In addition to the original factors, a qualified individual for purposes of coronavirus-related distributions is an individual who experiences 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- The individual having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19;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 childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or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.
For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.
The original factors included on the list include distributions made:
- On or after January 1, 2020, and before December 31, 2020;
- To a person diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention or whose spouse or dependent was so diagnosed; or
- To a person experiencing adverse financial consequences as a result of:
- Being quarantined, furloughed, or laid off;
- Having work hours reduced due to the virus;
- Being unable to work due to a lack of child care; or
- The closing or reducing of hours of a business owned or operated by the individual due to such virus.
The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions listed above in determining whether any distribution is a coronavirus-related distribution.