3801 / What special rules governing retirement plan distributions were implemented for distributions related to the COVID-19 impact?
Editor’s Note: Many were confused about whether the Consolidated Appropriations Act of 2021 (the CAA) extended the tax relief for coronavirus-related distributions (CRDs) discussed below. The law did not extend the CARES Act CRD provisions into 2021. The law provided the same type of tax relief for non-COVID-19 disasters, such as wildfires and hurricanes. The CARES Act relief provided for qualified plan loans was also extended for victims of non-COVID-19 disasters. Additionally, RMDs were not suspended for 2021. 2021 RMDs were calculated using the year-end account balance just like any other year.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allowed taxpayers to take up to $100,000 in distributions from an employer-sponsored retirement plan (401(k), 403(b) or defined benefit plan) or an IRA without the distribution becoming subject to the 10 percent early distribution penalty (the 25 percent early distribution penalty that applies to early distributions from SIMPLE IRAs was also waived). Unless the participant elected otherwise, the coronavirus-related distribution (CRD) was included in income ratably over three years, beginning with the tax year of distribution.
The actual amount of the CRD did not need to be tied to the amount the participant requires to satisfy the COVID-19-related financial need. The amount was also a per-taxpayer rule, not a per-plan rule, meaning that distributions from all plans were considered when determining whether they qualified for favorable tax treatment.1
Planning Point: Plan sponsors had discretion as to whether they chose to implement any of the CARES Act relief provisions. However, the employee could elect favorable tax relief on a personal tax return regardless of whether the employer chose to implement these options.
Note, however, that plans were not required to accept rollover contributions, which could create problems for participants in taking advantage of the three-year repayment option.