Withdrawals and Loans from Retirement Accounts for COVID-19 Expenses (IF11472, Version 1)
Summary
A Congressional Research Service report, IF11472, dated March 24, 2020, on withdrawing or borrowing from retirement accounts to meet COVID-19 expenses. Withdrawals from 401(k), 403(b) and Thrift Savings Plan accounts are generally allowed only as hardship distributions, while IRA withdrawals are allowed for any reason, and both are taxed and may face a 10% penalty before age 59½. Loans from defined contribution plans need no proof of hardship, but a default after job loss makes the balance taxable with the same penalty, and loans are not permitted from IRAs. The report finds it unclear whether COVID-19 expenses qualify under the disaster hardship rule, because FEMA said the President's emergency declaration does not make direct financial assistance available to individuals.
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March 24, 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 Individual Retirement Accounts Among other reasons, these deemed hardship
(IRAs). In addition, DC plans may allow participants to distributions include
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 IRAs are allowed adjusted gross income that would be
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 (other than the first four situations in the above
Law and Regulations bullet points) would be allowed under the hardship
Provisions for hardship distributions under current law and distribution regulation for disaster assistance. The
regulations include the following: regulation specifies that hardship distributions are allowed
for employees in an area designated for individual
Plans may allow—but are not required to offer— assistance as a result of a FEMA disaster declaration. In
hardship distributions. response to COVID-19, President Trump issued an
emergency declaration under the Stafford Act. In addition,
If plans allow hardship distributions, the plan document FEMA indicated that the “declaration does not make direct
must specify which situations qualify as hardship. financial assistance available to individuals.” 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.
https://crsreports.congress.gov
Withdrawals and Loans from Retirement Accounts for COVID-19 Expenses
Loans Under Current Law and sponsored retirement plans for qualified individuals.
Regulations Qualified individuals are defined as (1) any individual or
Provisions for plan loans under current law and regulations individual with a spouse or dependent who tested positive
include the following: for COVID-19, (2) any individual facing financial
difficulties due to being quarantined, furloughed, laid off,
DC plans may allow—but are not required to offer— or unable to work due to lack of child care or due to
loans. reduced work hours, and (3) any individual whose business
closed or reduced hours as a result of COVID-19. For
The maximum loan amount is the lesser of half of the qualified individuals, the provisions would
participant’s vested account balance or $50,000.
allow for penalty-free distributions of up to $100,000
Loans must be repaid in level installments over five from the date of the bill’s enactment through December
years. Longer terms are permitted if the loans are used 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 plan loans that are
19 related withdrawals and loans. due 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 such and could report it as income either in the year received or
expenses from the 10% penalty that applies to early equally over three years. Alternatively, part or all of the
withdrawals. In some instances, as part of past disaster distribution could be repaid to the retirement plan within
relief, Congress allowed for penalty-free distributions to three years of receiving the distribution.
individuals affected by natural disasters. Congress also
allowed these individuals to (1) include the distribution in Policy Considerations
taxable income over a three-year period and (2) recontribute
the distribution amount to their retirement account. Finally, Allowing individuals early access to their retirement funds
Congress has allowed plans to amend plan documents might help people facing financial difficulties. Some
retroactively. Disaster distributions have been generally temporary relief might be justified, particularly given
defined as distributions in a specific geographic area. current economic concerns. Allowing early access to
COVID-19 related distributions could similarly be defined, retirement accounts also may have drawbacks. First, funds
or limited to individuals with specified expenses, or could that individuals take from their retirement accounts to pay
be unrestricted. for current expenditures will not be available when the
individuals retire and would not accrue investment returns
Congress Could Adjust Loan Requirements in a potential market recovery. This is a concern because
Congress could adjust any of the loan requirements, such as many households rely on a combination of Social Security
increasing the maximum loan amount or extending the and withdrawals from their retirement accounts as income
repayment period. sources in retirement. Second, suspending the penalty on
withdrawals would not help individuals who are not
Internal Revenue Service (IRS) Could Deem permitted hardship or early withdrawals from their
COVID-19 Related Expenses as Hardship retirement accounts.
In the absence of Congressional action, the IRS could issue
regulations that specifically deem COVID-19 related For More Information
expenses as qualifying for a hardship distribution. Should
this occur, retirement plans that wish to (1) start offering CRS In Focus IF11369, Early Withdrawals from
hardship distributions or (2) include COVID-19 related Individual Retirement Accounts (IRAs) and 401(k) Plans
expenses as a qualifying hardship situation would need to
amend their plan documents. CRS Report R40828, An Analysis of Borrowing From
Defined Contribution Retirement Plans
Legislative Proposals in the 116th
Congress CRS Report R46279, The Coronavirus Aid, Relief, and
Section 2103 of Division B of S. 3548, the “Coronavirus Economic Security (CARES) Act—Tax Relief for
Aid, Relief, and Economic Security Act,” or “CARES Act,” Individuals and Businesses
as introduced on March 19, 2020, and Section 401 of
Division T of H.R. 6379, “The Take Responsibility for John J. Topoleski, Specialist in Income Security
Workers and Families Act,” as introduced on March 23, Elizabeth A. Myers, Analyst in Income Security
2020, contain nearly identical provisions that would modify
rules for early withdrawals and loans from employer- IF11472
https://crsreports.congress.gov
Withdrawals and Loans from Retirement Accounts for COVID-19 Expenses
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https://crsreports.congress.gov | IF11472 · VERSION 1 · NEW
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