Coronavirus Related Distributions

The COVID-19 pandemic has taken its toll on Atlanta businesses and residents. The initial round of forced business closures and stay at home orders required many businesses to terminate, furlough, or reduce employee hours. Driven mainly by reduced demand for products and services these changes were needed to ensure many businesses could survive. Since the restrictions were lifted and businesses reopened many former employees were rehired. However, as cases of COVID-19 reach new highs, an average of 42 new cases diagnosed per day, there is significant concern about the economic impact of the resurgence. A recent U.S. Department of Labor (DOL) report found the average Georgia unemployment rate between July 2019 and July 2020 more than doubled from 3.5% to 7.6%.  All of this against the backdrop of renewed COVID-19 restrictions recently issued by Gov. Brian Kemp. The increasing cases coupled with new restrictions mean it is possible Atlanta unemployment numbers will continue to climb. The good news is those impacted by COVID-19 can not only claim federal unemployment benefits, but they can also turn to their retirement plan as a funding source. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key information below.

Coronavirus Related Distributions

When the CARES Act was passed earlier this year, it created a new class of plan distributions, for 2020 only, which allows qualifying participants to take a one-time distribution of up to $100,000. Known as Coronavirus Related Distributions (CRD), these special distributions can only be taken through the end of the year. It also made it an optional benefit allowing plan sponsors to decide independently whether to offer the benefit. It is important to note defined benefit plan participants may not take these distributions unless they are at least 59 ½. Finally, individual retirement account (IRA) owners are eligible to take a Coronavirus Related Distribution.

Eligibility

In order to be considered eligible, an individual must meet one of the following criteria listed below.

• Any individual that is diagnosed with the SARS-CoV-2 or with COVID-19 by a CDC approved test.
• Any individual whose spouse is diagnosed with COVID-19 by a CDC approved test.
• Any individual who experienced adverse financial consequences as a result of quarantine, including being furloughed or laid off, or closing or reduction of hours of a business owned or operated by the individual due to COVID-19.
• Any individual experiencing adverse financial conditions because of a reduction in pay (including self-employment income) or having a job offer rescinded or start date delayed due to COVID-19. In addition, those who are unable to work due to lack of childcare or a reduction in hours of a business owned or operated by the individual’s spouse/member of the household due to COVID-19.

Self-Certification

It is important to note that participants are allowed to self-certify they meet eligibility criteria. Below is a sample self-certification letter provided by the IRS.

Name: _______________________ (and other identifying information requested by the employer for administrative purposes).

 I certify that I meet at least one of the following conditions: (1) I was diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively as COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); (2) my spouse or my dependent was diagnosed with COVID-19 by 10 a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or (3) I have experienced adverse financial consequences because: (i) I, my spouse, or a member of my household was quarantined, furloughed or laid off, or had work hours reduced due to COVID-19; (ii) I, my spouse, or a member of my household was unable to work due to lack of childcare due to COVID-19; (iii) a business owned or operated by me, my spouse, or a member of my household closed or reduced hours due to COVID-19; or (iv) I, my spouse, or a member of my household had a reduction in pay (or self-employment income) due to COVID-19 or had a job offer rescinded or start date for a job delayed due to COVID-19.

Signature: ______________________

Tax Treatment of Distributions

CRDs are not treated as qualifying rollover distributions, so they are not subject to the typical 20% withholding or the 10% tax on distributions made prior to 59 ½. In addition, unlike regular distributions that are subject to federal income tax in the year taken, the corresponding income tax for CRDs can be spread over a three-year period. Finally, participants also have the right to recontribute all, or part, of the distribution to an eligible plan (excluding IRAs) that accept rollovers.

In situations when a plan elects not to offers CRDs, any distribution made to a qualified individual, even if it occurred before the CARES Act passed, may be designated as a CRD. In order to qualify a participant does not have to demonstrate loss due to COVID-19, but the total distribution amount can not exceed $100,000.

Contact Us

The rapidly changing COVID-19 situation may result in an additional loss of employment and income. CRDs are an option that should be considered if it is challenging to maintain a sustainable income. The favorable tax treatment makes it an interesting option to consider. If you have questions about the information outlined above or need assistance with a tax planning or compliance issue, Wilson Lewis can help. For additional details call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.