Temporary Waiver of Early Withdrawal Penalty for Certain Withdrawals from Qualified Retirement Plans

The CARES Act provides that the 10-percent penalty for early withdrawal from a qualified retirement plan is waived for distributions of up to $100,000 for “coronavirus-related” purposes. If a distribution to an individual is considered to be a “coronavirus-related distribution’” a plan will not be treated as violating any requirement of the Code merely because the plan treats the distribution as a “coronavirus-related distribution,” unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to the individual exceeds $100,000. Distributions are considered “coronavirus-related” if they are distributed from an eligible retirement plan during the 2020 calendar year to 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 SARS-CoV-2 or COVID-19 by a test approved by the CDC, or

—  who experiences adverse financial consequences as a result of:

• ­ being quarantined, furloughed, laid off, or having work hours reduced due to COVID-19; or
• ­ being unable to work due to lack of child care due to COVID-19; or
• ­ losing or reducing hours of a business owned or operated by the individual because of COVID-19; or
• ­ other factors determined by the Treasury.

When determining whether a distribution is considered a “coronavirus-related distribution,” the plan administrator may rely on an employee’s certification that the employee satisfies one of the conditions stated above.

If an individual receives a “coronavirus-related distribution,” the distribution is included in income ratably over three years, unless the taxpayer elects to include the entire distribution in income in the year of distribution. Alternatively, any individual who receives a “coronavirus-related distribution” is permitted, at any time during the three-year period beginning on the day after the date the distribution was received, to make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which the individual is a beneficiary and to which a rollover contribution of such distribution could be made under certain provisions of the Code. 

The CARES Act also stipulates that the limit on loans from qualified plans is increased from $50,000 to $100,000.  The loan is limited to the present value of the non-forfeitable accrued benefit of the employee under the plan. The loan limit is increased for a 180-day period starting on March 27, 2020.

Additionally, The CARES Act provides that the repayment due dates with respect to certain outstanding loans from qualified plans made to qualified individuals that were otherwise due between March 27, 2020 and December 31, 2020, will be delayed for one year. Further, the CARES Act provides that any subsequent repayments will be adjusted to reflect the delay and any interest accrued during such delay.