Recently, the IRS issued Notice 2020-50 to update and clarify certain provisions of Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which deals with the tax treatment of coronavirus-related distributions from eligible retirement plans for qualified individuals.
Under the CARES Act, retirement plan participants may borrow up to $100,000 or 100% of their vested balance, whichever is less. This applies only to loans taken out from March 27, 2020, to September 23, 2020 and comes with the following tax benefits:
- 10% tax penalty is waived, although withdrawals are still taxed as ordinary income;
- Withdrawals will not be subject to mandatory 20% withholding from an early distribution;
- Total withdrawal amount can be spread over three years for tax purposes; and
- Participants have up to three years to return funds, which can be paid back to any eligible retirement plan with no tax consequence.
- Has been diagnosed, or whose spouse or dependent has been diagnosed, with COVID-19 by a test approved by the CDC; or
- Has experienced adverse financial consequences due to COVID-19 as a result of being furloughed, laid off, quarantined, had work hours reduced, had a business owned or operated by an individual closed or operating under reduced hours, or is unable to work due to lack of childcare.
- Has been diagnosed, or whose spouse or dependent has been diagnosed, with COVID-19 by a test approved by the CDC; or
- Has experienced adverse financial consequences due to COVID-19 as a result of the individual, the individual’s spouse, or a member of the individual’s household:
- Being quarantined, being furloughed or laid off, or having work hours reduced;
- Being unable to work due to lack of childcare;
- Closing or reducing hours of a business that they own or operate;
- Having pay or self-employment income reduced; or
- Having a job offer rescinded or start date for a job delayed.
