CAA Suspends Rules for Early Distributions from Qualified Retirement Plans

Among its COVID-19 relief provisions, the Consolidated Appropriations Act of 2021 ("CAA") allows taxpayers affected by a qualifying disaster to take distributions of up to $100,000 from their qualified retirement plans. Under the provision, they can pay the tax over a three-year period and are exempted from the usual 10 percent penalty on early distributions.

Under the CAA, a qualified disaster is defined as:
  • a presidentially declared disaster between December 28, 2019 and December 31, 2020; or
  • a qualified disaster area per the Stafford Act that has been declared by the President between January 1,2020 and February 19, 2021; or
  • the same as “major disaster” per the Stafford Act and within the timeframe of December 28, 2019 through December 31, 2020.

Qualified disasters are monitored and made public by FEMA, and listed on their disaster declarations page.

Under the CAA, disaster relief is available only in connection with recent natural disasters other than those solely related to COVID-19. The COVID-19 provisions of the CCA provide temporary relief from the partial plan termination rules under section 411(d)(3) of the Internal Revenue Code of 1986, as amended, for employee turnover due to the COVID-19 pandemic period.

In the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress modified its qualified disaster distribution rules by removing the 10 percent tax for early withdrawals for coronavirus-related distributions of up to $100,000. To qualify the distribution must be from an IRA or eligible defined contribution plan, including 401(k), 403(b), and 457(b) plans, and made between January 1 and December 31, 2020.

In addition, the distribution must be made 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, or
  • whose spouse or dependent is diagnosed with such virus or disease by such a test, or
  • who experiences adverse financial consequences as a result the coronavirus.

Adverse financial consequences can include consequences resulting from an individual, individual’s spouse, or household member (defined as someone who shares the individual’s principal residence):

  • being quarantined,
  • being furloughed or laid off or having work hours reduced due to such virus or disease,
  • being unable to work due to lack of child care due to such virus or disease,
  • whose owned or operated business was closed or had operating hours reduced due to such virus or disease,
  • incurring a reduction in pay or self-employment income,
  • having a job offer rescinded or start date for a job delayed, or
  • other factors as determined by the Secretary of the Treasury.

If you have taken advantage of the CARES Act or CAA provisions for retirement plan distributions and have questions on how this may impact your taxes please reach out to your HBK Tax Advisor or HBKS Wealth Advisor.

About the Author(s)
Cassandra Baubie is an Senior Associate at HBK CPAs & Consultants and is a member of its Tax Advisory Group (TAG). Cassandra joined HBK in 2017. She works in the firm’s Youngstown, Ohio office. She has experience in tax law research and writing. Prior to joining HBK, she worked for, a global legal news organization, and was a member of the University of Pittsburgh Tax Law Review Journal. Cassandra also worked for the University of Pittsburgh School of Law’s Low-Income Tax Clinic where she performed IRS litigation and Tax Court work and provided compliance work for low income individuals and businesses. Cassandra focuses on issues pertaining to State and Local Taxation (SALT), as well as flow through entity taxation. She has been involved in numerous sales and use tax, franchise tax, and corporate income tax audits, VDA’s, and refund requests. She focuses on complex sales and use tax compliance planning, nexus studies and on-site review and training for all SALT related issues, and has managed various engagements as the in-charge team member and has significant experience in multi-state tax issues.
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