The CARES Act (the pandemic-related ‘‘Coronavirus Aid, Relief, and Economic Security Act’’ passed in March 2020) permitted an Employer to amend its 401k or 403b Plan (and certain other Retirement Plans) to allow a Plan participant to take a “special” withdrawal from the Plan, if the individual “experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to” COVID-19. A self-employed business owner who closed or reduced the hours of the business also qualified.
This coronavirus-related distribution (CRD) was penalty-free (i.e., no pre-age-59-1/2 early payment 10% tax), was a maximum of $100,000, and was allowed to be taken through December 31, 2020.
Many employees and business owners took advantage of CRDs as a financial lifeline during what were difficult circumstances in 2020.
An important aspect of the law, since forgotten by many, is the right to make partial or full “repayment” of a CRD. Repayment is permitted any time during the three year period after taking the distribution. Therefore, there likely is an opportunity to put some or all of a CRD back into retirement savings this year.
CRD repayment occurs by making a special “rollover contribution” into the same Plan, or into another employer’s Plan if there was a job change (assuming the Plan permits rollover contributions), or into an Individual Retirement Account (IRA). The typical 60 day rollover rule does not apply to CRD rollover contributions.
CRD rollovers can be multiple partial repayments, at various times, until the three year repayment period ends.
The income taxation that occurred in the 2020 Tax Year, or was spread over the 2020-to-2022 Tax Years, because of the CRD, will be reconciled and “reduced” or “offset” by the repayment. This likely would create a tax refund for the 2023 Tax Year, because of the taxes previously paid on the CRD.
Given how financial circumstances may have changed significantly in the last three years, CRD repayment potentially is something to consider for yourself, for your employees, or for financial and tax advisors’ clients.
ACSI is available to answer questions about CRD repayments into Plans for which we provide TPA services.