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Are Coronavirus-Related Distributions Available in 2021?

Mar 30, 2021SML Planning Minute Podcast, COVID 19 Information, Company News

Episode 119 – Don’t confuse Qualified Disaster Distributions (QDDs) with Coronavirus-Related Distributions (CRDs), which ended in 2020. A QDD is available only for non-COVID-19-related major disasters, such as hurricanes, wildfires, severe storms and other disasters. Learn more here, including the qualifications required to take a QDD.

Transcript of Podcast Episode 119

Distributions from an IRA or qualified retirement plan made prior to the participant attaining the age of 59½ years will typically result in a 10 percent tax penalty. However, in 2020 as a result of the COVID-19 pandemic, many people struggled financially because of job loss, furlough, childcare issues, sickness and more. Then on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. One of the many pandemic-relief provisions in the CARES Act allowed distributions to be made to individuals under the age of 59½ years from their IRAs and qualified retirement plans of up to $100,000 in the aggregate without penalty, so that struggling Americans could make ends meet. While taxes would still be owed on these distributions, the taxes could be spread out over a three-year period. In addition, the distributions could be recontributed back into the IRA or retirement plan within three years. These coronavirus-related distributions (“CRDs”) were authorized through December 30, 2020.

With the continuing pandemic, additional relief was provided through the Consolidated Appropriations Act, 2021 (“CAA, 2021”) signed into law on December 27, 2020. While the CAA, 2021 added a provision to allow for CRDs to be taken from money purchase pension plans, which were not included in the CARES Act, it did NOT extend the CRD provisions into 2021.

When the pandemic raged into 2021, many Americans were under the belief that CRDs were still available in 2021. After all, many workers remain unemployed, businesses remain shuttered or operating at reduced capacity, and general financial hardship abounds. While it is possible that the Biden Administration and Congress will reconsider this issue and extend the CRDs, a provision of the CAA, 2021 that has not received great media attention has contributed to the confusion. The provision is very similar to CRDs, but with some key differences. These distributions are known as Qualified Disaster Distributions (“QDDs”). Adding to the confusion is that the CAA, 2021 includes sections with their own suggestive titles, including the COVID-Related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Relief Act of 2020 (“TCDRA”). The QDD provisions are located in Title III of the TCDRA.

The qualifications to obtain a QDD are complicated. Before a QDD can be made, the following must occur:

  • A declaration by the President of a major disaster pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act, during the period beginning on January 1, 2020, and ending on the date 60 days from the enactment of the act (i.e., February 25, 2021), if the “incident period” began on or after December 28, 2019, and on or before the date of the enactment of the Act (i.e., December 27, 2020).
  • The “incident period” is the period of the qualified disaster as specified by the Federal Emergency Management Agency (commonly known as FEMA). However, the disaster must have been declared between January 1, 2020, to February 25, 2021, AND the incident period must have begun on or after December 28, 2019, and on or before December 27, 2020.
  • The disaster must have occurred in an area where the individual’s principal place of abode was located, AND the individual must have sustained an economic loss by reason of such qualified disaster.

If all those requirements are satisfied, individuals under the age of 59½ years can withdraw up to $100,000 in the aggregate from their IRA and/or qualified retirement plan without the 10 percent penalty tax. In addition, the income taxes can be paid over a three-year period, and the distributions can be recontributed into the IRA or retirement plan within three years. These provisions are the same as the coronavirus-related distributions authorized by the CARES Act. Most importantly and unfortunately, however, the TCDRA specifically states that a qualified disaster area does NOT “include any area with respect to which such a major disaster has been so declared only by reason of COVID–19.” In other words, COVID-19-alone is not sufficient. A QDD is available only for non-COVID-19-related major disasters, such as hurricanes, wildfires, severe storms and other disasters.

Because of the similarities in the provisions for qualified disaster distributions and coronavirus-related distributions, and because of the continuing COVID-19 pandemic, there remains much confusion about the availability of CRDs. Currently, the ability to take a CRD expired last year. Perhaps the new Presidential Administration and Congress will renew this pandemic-related relief for 2021.

As developments occur, we will be sure to keep you informed.

Tax laws are complex and subject to change. The information presented is based on current interpretation of the laws as of the date of publication, is intended for general information purposes only, and does not constitute legal or tax advice. This information is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code or any other applicable tax law. Taxpayers are advised to seek tax advice based on their particular circumstances from an independent tax advisor. Neither Security Mutual nor its agents are permitted to provide tax or legal advice.

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