The Internal Revenue Service (IRS) issued Notice 2020-50 to provide guidance on coronavirus-related distributions under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This alert summarizes the key provisions of Notice 2020-50. Background Section 2202 of the CARES Act provides that qualified individuals receive favorable tax treatment with respect to distributions from eligible retirement plans1 that are coronavirus-related distributions. A coronavirus-related distribution (i) is not subject to the 10% additional tax under § 72(t) of the Internal Revenue Code (Code) (including the 25% additional tax under § 72(t)(6) for certain distributions from SIMPLE IRAs), (ii) may be includible in income over a 3-year period, and, (iii) to the extent the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan within a 3-year period, will not be includible in income. Section 2202 of the CARES Act also increases the allowable plan loan amount under § 72(p) of the Code and permits a suspension of payments for plan loans outstanding on or after March 27, 2020, that are made to qualified individuals. See Cheiron’s previous alert, Retirement Plan Distributions Permitted by the CARES Act. Guidance Under Notice 2020-50
CHEIRON OBSERVATION: Ideally, plan sponsors will coordinate with participants and communicate to them how the coronavirus-related distributions will be coded by the plan for tax purposes. Without some coordination, the plan may treat a distribution differently than the way the participant intends for it to be treated. For example; some payments (such as lump sum payments) may have the 20% withholding applied even though the participant intends to treat them as coronavirus-related distributions that are not subject to withholding.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice. 1 Under Code Section 402(c)(8) an eligible retirement plan includes an individual retirement arrangement (IRA) under § 408(a) or (b), a qualified plan under § 401(a), an annuity plan under § 403(a), a § 403(b) plan, and a governmental deferred compensation plan under § 457(b). 2 However, the following amounts are not coronavirus-related distributions: corrective distributions of elective deferrals and employee contributions that are returned to the employee (together with the income allocable thereto) in order to comply with the § 415 limitations, excess elective deferrals under § 402(g), excess contributions under § 401(k), and excess aggregate contributions under § 401(m); loans that are treated as deemed distributions pursuant to § 72(p); dividends paid on applicable employer securities under § 404(k); the costs of current life insurance protection; prohibited allocations that are treated as deemed distributions pursuant to § 409(p); distributions that are permissible withdrawals from an eligible automatic contribution arrangement within the meaning of § 414(w); and distributions of premiums for accident or health insurance under § 1.402(a)-1(e)(1)(i). 3 Notice 2020-50 notes that the individual is entitled to treat the distribution as a coronavirus-related distribution for purposes of the individual’s federal income tax return only if the individual actually meets the eligibility requirements. How can I withdraw money from my IRA without penalty?Once you reach age 59½, you can withdraw funds from your Traditional IRA without restrictions or penalties.
How much can I withdraw from my IRA without paying taxes?Your first home – You can early withdraw up to $10,000 from an IRA without penalties if you put the money toward buying your first home. Health insurance – If you become unemployed and you need to purchase health insurance, you can make a penalty-free early withdrawal.
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