Congressional Research Service IF11472.2 (Withdrawals and Loans from Retirement Accounts for COVID-19 Expenses)
Summary
A Congressional Research Service product, IF11472 (version 2), updated March 27, 2020, on withdrawals and loans from retirement accounts for COVID-19 expenses. It explains that defined contribution (DC) plans such as 401(k) plans, 403(b) plans and the Thrift Savings Plan may allow hardship distributions, while withdrawals from traditional or Roth IRAs are allowed for any reason. It notes that the taxable portion of such withdrawals counts as income and may face a 10% penalty, which does not apply to individuals aged 59½ or older or for reasons listed in 26 U.S.C. §72(t). It also describes loans from DC plans, which do not require proof of financial hardship.
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Full text
Updated March 27, 2020
Withdrawals and Loans from Retirement Accounts for COVID-
19 Expenses
The economic repercussions of COVID-19 could reduce Certain distributions are deemed to be made on account
Americans’ economic security; in response, individuals of immediate and heavy financial need. The individual
may view their retirement accounts as a source of funds to does not have to demonstrate financial need if the
help meet current expenses. They may be able to withdraw distribution is for one of seven specified situations (26
from their defined contribution (DC) retirement accounts C.F.R §1.401(k)-1(d)(3)(B)).
(such as 401(k) plans, 403(b) plans, and the Thrift Savings
Plan (TSP)) or from their traditional or Roth Individual Among other reasons, these deemed hardship
Retirement Accounts (IRAs). In addition, DC plans may distributions include
allow participants to borrow from their accounts.
tuition, fees, and other expenses for the next
Withdrawals from Retirement Accounts 12 months of post-secondary education (this
In general, withdrawals from DC plans are not allowed until appears to exclude student loan repayments),
retirement. However, DC plans may allow individuals to
withdraw funds for a financial difficulty, referred to as a certain medical expenses in excess of 7.5% of
hardship distribution. Withdrawals from traditional or Roth adjusted gross income that would be
IRAs are allowed for any reason. deductible under 26 U.S.C. §213(d),
Individuals who take a hardship distribution from a DC payments necessary to prevent eviction or
plan or withdraw from an IRA (1) must include the taxable foreclosure for a principal residence,
portion of the distribution in that year’s taxable income and
(2) may face a 10% penalty on the amount withdrawn. The burial and funeral expenses for an individual’s
penalty is meant to discourage the use of retirement account parent, spouse, child, or dependent, and
funds for preretirement purposes. The penalty does not
apply if the individual is aged 59½ years or older, or if the expenses and losses due to a disaster declared
reason for the distribution is listed in 26 U.S.C. §72(t). under the Robert T. Stafford Disaster Relief
and Emergency Assistance Act (P.L. 93-288),
Loans from DC Plans “provided that the employee’s principal
Loans may be preferred to early withdrawals because (1) residence or principal place of employment at
proof of financial hardship is not required, and (2) amounts the time of the disaster was located in an area
borrowed are repaid to the individual’s account. However, designated by FEMA [the Federal Emergency
in the case of a loan default (i.e., following job loss if the Management Agency] for individual
borrower fails to repay the outstanding loan balance by the assistance with respect to the disaster.”
deadline for that year’s tax return), the loan balance must be
included in taxable income, and a 10% tax penalty applies. Hardship Distributions for COVID-19
Loans are not permitted from IRAs. Related Expenses
It is unclear whether distributions for COVID-19 related
Hardship Distributions Under Current expenses would be allowed under the hardship distribution
Law and Regulations regulation for disaster assistance. The regulation specifies
Provisions for hardship distributions under current law and that hardship distributions are allowed for employees in an
regulations include the following: area designated for individual assistance as a result of a
FEMA disaster declaration. In response to COVID-19,
DC plans may allow—but are not required to offer— President Trump issued an emergency declaration under the
hardship distributions. Stafford Act. In addition, FEMA indicated that the
“declaration does not make direct financial assistance
If DC plans allow hardship distributions, the plan available to individuals.” A number of states have received
document must specify which situations qualify as disaster declarations, although it is unclear if individual
hardship. assistance has been approved for these states. For more
information on the emergency declaration issued by
Individuals must demonstrate that they are experiencing President Trump in response to COVID-19, see CRS
immediate and heavy financial need to take a hardship Insight IN11251, The Stafford Act Emergency Declaration
distribution and that the amount withdrawn does not for COVID-19.
exceed the financial need.
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Withdrawals and Loans from Retirement Accounts for COVID-19 Expenses
Loans Under Current Law and rules for early withdrawals and loans from employer-
Regulations sponsored retirement plans for qualified individuals.
Provisions for DC plan loans under current law and Qualified individuals are defined as (1) any individual or
regulations include the following: individual with a spouse or dependent who tested positive
for COVID-19, (2) any individual facing financial
DC plans may allow—but are not required to offer— difficulties due to being quarantined, furloughed, laid off,
loans. or unable to work due to lack of child care or due to
reduced work hours, and (3) any individual whose business
The maximum loan amount is the lesser of half of the closed or reduced hours as a result of COVID-19. For
participant’s vested account balance or $50,000. qualified individuals, the provisions would
Loans must be repaid in level installments over five allow for penalty-free distributions of up to $100,000
years. Longer terms are permitted if the loans are used from January 1, 2020, through December 31, 2020,
for the purchase or construction of a principal residence.
increase the maximum loan limit from $50,000 to
Policy Options $100,000 for 180 days after the bill’s enactment, and
Congress and the Internal Revenue Service (IRS) have
several policy options that could provide relief for COVID- extend the due date by one year for DC plan loans that
19 related withdrawals and loans. are in repayment from the date of the bill’s enactment
through December 31, 2020.
Congress Could Exempt COVID-19 Related
Expenses from the 10% Penalty Under the proposal, individuals who take a COVID-19
Congress could allow for distributions from retirement distribution would include the amount in taxable income
plans for COVID-19 related expenses and exempt and could report it as income either in the year received or
distributions for such expenses from the 10% penalty that spread equally over three years. Alternatively, part or all of
applies to early withdrawals. In some instances, as part of the distribution could be repaid to the retirement plan
past disaster relief, Congress allowed for penalty-free within three years of receiving the distribution.
distributions to individuals affected by natural disasters.
Congress also allowed these individuals to (1) include the Policy Considerations
distribution in taxable income spread over a three-year
period and (2) recontribute the distribution amount to their Allowing individuals early access to their retirement funds
retirement account. Additionally, Congress has allowed might help people facing financial difficulties. Some
plans to amend plan documents retroactively. Disaster temporary relief might be justified, particularly given
distributions have been generally defined as distributions in current economic concerns. Allowing early access to
a specific geographic area. COVID-19 related distributions retirement accounts also may have drawbacks. First, funds
could similarly be defined, or limited to individuals with that individuals take from their retirement accounts to pay
specified expenses or circumstances, or such distributions for current expenditures will not be available when the
could be unrestricted. individuals retire and would not accrue investment returns
in a potential market recovery. This is a concern for some
Congress Could Adjust Loan Requirements because many households rely on a combination of Social
Congress could adjust any of the loan requirements, such as Security and withdrawals from their retirement accounts as
increasing the maximum loan amount or extending the income sources in retirement. Second, suspending the
repayment period. penalty on withdrawals would not help individuals who are
not permitted hardship or early withdrawals from their
Internal Revenue Service (IRS) Could Deem retirement accounts.
COVID-19 Related Expenses as Hardship
In the absence of Congressional action, the IRS could issue For More Information
regulations that specifically deem COVID-19 related
expenses as qualifying for a hardship distribution. Should CRS In Focus IF11369, Early Withdrawals from
this occur, retirement plans that seek to (1) start offering Individual Retirement Accounts (IRAs) and 401(k) Plans
hardship distributions or (2) include COVID-19 related
expenses as a qualifying hardship situation would need to CRS Report R40828, An Analysis of Borrowing From
amend their plan documents. Defined Contribution Retirement Plans
Legislative Proposals in the 116th CRS Report R46279, The Coronavirus Aid, Relief, and
Congress Economic Security (CARES) Act—Tax Relief for
Section 2202 of Division A of H.R. 748, the “Coronavirus Individuals and Businesses
Aid, Relief, and Economic Security Act,” or “CARES Act,”
as passed by the Senate on March 26, 2020, and by the John J. Topoleski, Specialist in Income Security
House on March 27, 2020, as well as Section 401 of Elizabeth A. Myers, Analyst in Income Security
Division T of H.R. 6379, the “Take Responsibility for
Workers and Families Act,” as introduced on March 23, IF11472
2020, contain nearly identical provisions that would modify
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Withdrawals and Loans from Retirement Accounts for COVID-19 Expenses
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https://crsreports.congress.gov | IF11472 · VERSION 2 · UPDATED
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