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The IRS Looking to Help Those Financially Affected by the Pandemic

11:00 July 02, 2020
By: Clara Lacey

The Internal Revenue Service announced Friday that it has expanded access to plan distributions and plan loans of the CARES Act to include eligibility for retirement-plan participants affected by the COVID-19 pandemic, according to USA Today. This expansion would "take into account additional factors, such as reductions in pay, rescissions of job offers, and delayed start dates." The IRS will also be providing information and examples for these qualified individuals "to reflect the tax treatment of these distributions and loans on their federal income tax filings."

This Notice 2020-50 also expands the criteria for a qualified individual to include anyone who is diagnosed or has a spouse or dependent diagnosed with COVID-19, based on the test from the Centers for Disease Control and Prevention (CDC) . Along with this, a qualified individual may be someone who has experienced adverse financial consequences or challenges as a result of the diagnosed individual, individual's spouse, or member of the individual's household.

These challenges include many different ways the coronavirus has affected the financial state of an individual or household. These include being quarantined, furloughed, laid off, or having work hours reduced because of COVID-19; being unable to work because of lack of childcare during COVID-19; closing or reducing hours of a business, which they own or operate, due to COVID-19; having pay or self-employment income reduced; or having a job offer rescinded or the start date for a job delayed due to COVID-19.

This comes at a time in which most Americans are experiencing economic hardship and complications because of the financial effects of the coronavirus pandemic. The Coronavirus Aid, Relief, and Economic Security Act has allowed these Americans struggling economically to withdraw money from their retirement accounts. Investors of any age can withdraw as much as $100,000 from retirement accounts including 401(k) plans and individual retirement accounts without paying an early-withdrawal penalty of 10 percent this year. If the money is returned to the account within three years, they can avoid taxes on the withdrawal.

While many people are struggling to pay their bills after losing their jobs or are facing other financial problems from the coronavirus crisis, experts do not encourage taking money out of retirement accounts as a solution to current issues.

"People work hard for their retirement savings, and you should dip into that as a last resort," says Charlie Nelson, CEO of retirement and employee benefits at Voya Financial, to USA Today. "Americans need to think long and hard about other sources of savings first before withdrawing money from retirement funds."

The IRS has clarified that employers can decide whether to implement the coronavirus-related distribution and loan rules, but "qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions aren't changed."

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