Life always continues no matter how big disasters or haphazard events hit our lives. One such disaster hit the world at the beginning of 2021 and proved to be one of the biggest pandemics this generation has seen. COVID-19 pandemic was not the only problem, but the contagious virus rolled out had its economic and financial implications as well.
The lives of people were disturbed in America as well. With border closures, business shutdowns, and social distancing, a lot of people lost their jobs while others were struggling to maintain their businesses. The biggest tragedy was the increasing number of infections among populations. In short, the situation emerged as a financial, health, economic, and social disaster for every person and business.
Therefore, the congress and president of the USA announced to provide relief to people bearing financial burdens due to health losses, economic losses, etc. One relief measure was the announcement of qualified disaster distribution for eligible retirement plans and IRAs.
In this article, we are going to explain what qualified disaster distribution is, taxes, reporting, etc., with all the FAQs answered.
What Is Qualified Disaster Distribution?
Qualified Disaster Distribution is related to drawing money from retirement plans or IRAs before the age of 60. In normal circumstances, drawing money out of the retirement plan is subject to an additional tax of 10%. For drawing money out of Simple IRA plans, you have to pay an additional tax of 25% when money is drawn out in the first two years of participation.
When these withdrawals are made during a nationally declared disaster or state-declared disaster, it’s called qualified disaster distribution. To understand this, consider the coronavirus tax relief announced by the Government of the United States under the CARES Act of 2020.
It implies that,
Any distributions from the qualified retirement distributions that are not greater than $100,000 can be made in Federally Declared Disaster Areas. Such distributions, when not exceeding the aggregate amount of $100,000, are not subject to an additional 10% tax as an early withdrawal penalty
What Are the Qualifying Criteria For Qualified Disaster Distributions?
Any individual living and working in any of the 50 states having an eligible retirement plan can be qualified for QDA if any of the following conditions are met:
- SARS-CoV-2(coronavirus disease 2019) is diagnosed in the individual through a test approved by the Centers for Disease Control and Prevention
- Any dependent or spouse of the individual with eligible retirement plans is infected by SARS-CoV-2 and diagnosed by a test approved by the Centers for Disease Control and Prevention
- Quarantine, layoffs, furlough, or reduced working hours have impacted your financial circumstances leaving you to experience adverse financial consequences
- Your inability to work due to lack of child care because of SARS-CoV-2 led you to financial consequences
- The adverse financial consequences are experienced due to closing or reducing working hours of your personal business
These are general factors that help in deciding if an individual with an eligible retirement plan qualifies for the retirement plan drawings or not. The Treasury Department or IRS may issue any additional notification to determine qualified individual criteria by expanding the list of factors.
How Does Qualified Disaster Distribution Work?
Qualified Disaster Distribution working can be explained as
Any withdrawal taken from the 401(k) retirement plan during a federally declared disaster that does not exceed $100,000 is Qualified disaster Distribution. Another important factor to consider is that the withdrawals are made to recover from the financial consequences of the disaster.
The distribution taken out has to be repaid by the individual, and the implications of relief are as follows:
- As mentioned earlier, waiving off 10% additional tax applied on early distributions
- Qualified disaster distribution can be included in income for over three years
- Repayment of any withdrawal has to be made within three years
- You can borrow more funds as a plan loan from distribution to repay over a longer period than three years
The sum of withdrawals made in previous disasters plus coronavirus disaster withdrawal, as an aggregate, should not exceed $100,000.
Form 8195-E And Qualified Disaster Distribution
When an individual wants to claim Qualified Disaster Distribution, he can file Form 8915-E for reporting the distribution. Filing Form 8195-E makes you eligible for a penalty-free distribution in any circumstances discussed earlier.
Since the distribution is taxable, you can pay the tax over three tax years(2020, 2021, and 2022) in case of coronavirus relief). The repayment can be made in full or in parts during the course of three years.
What Information To Be Filled In Form 8195-E?
Since Form 8915-E makes you eligible for Qualified Disaster Distribution, understanding how to file it is also important. You will start filling out the form with your name and SSN.
The information related to distribution is made in the following sections as per your tax circumstances:
- Part I: Total Distributions From All Retirement Plans (Including IRAs)
- Part II: Qualified 2020 Disaster Distributions From Retirement Plans (Other Than IRAs)
- Part III: Qualified 2020 Disaster Distributions From Traditional, SEP, SIMPLE, and Roth IRAs (If you’re filling out this section, you might have to also complete Form 8606)
- Part IV: Qualified Distributions for the Purchase or Construction of a Main Home in Qualified 2020 Disaster Areas
If you’re filing the form as a part of your tax return, there’s no need to sign it. However, you must sign it when filing alone and not with a tax return.
FAQs
Here are some frequently asked questions and the answers as given by the IRS:
What are the special rules for retirement plans and IRAs rules in section 2202 of the CARES Act?
According to Section 2202 of the CARES Act 2020, the expanded distribution and relief in tax treatment are provided to people making withdrawals from eligible retirement plans. These covid-19-related distributions should not exceed $100,000 to qualify for relief.
How to know if I am a qualified individual for purposes of section 2202?
We have discussed the criteria of a qualified individual for purposes of Section 2202 of the CARES Act 2020:
- SARS-CoV-2(coronavirus disease 2019) is diagnosed in the individual through a test approved by the Centers for Disease Control and Prevention
- Any dependent or spouse of the individual with eligible retirement plans is infected by SARS-CoV-2 and diagnosed by a test approved by the Centers for Disease Control and Prevention
- Quarantine, layoffs, furlough, or reduced working hours have impacted your financial circumstances leaving you to experience adverse financial consequences
- Your inability to work due to lack of child care because of SARS-CoV-2 led you to financial consequences
- The adverse financial consequences are experienced due to closing or reducing working hours of your personal business
What are eligible retirement plans for Qualified Disaster Distribution?
Eligible retirement plans usually include certain employer retirement plans like 401(k), 403(b), IRAs, etc.
How much an amount can be drawn from eligible retirement plans?
The amount withdrawn from eligible retirement plans should not exceed $100,000, including any withdrawals made in the past.
Is an additional tax of 10% applied on coronavirus-related distribution from my retirement plan or IRA?
No additional 10% tax is applied on distributions related to coronavirus relief.
When do I have to pay taxes on coronavirus-related distributions?
According to the guidance of the IRS, the taxes on coronavirus-related distributions can be carried forward for three tax years. It means you can report the distribution as income over the next three years. For instance, if an individual had received $12,000 as coronavirus distribution in 2020, he can add $4000 in 2020, 2021, and 2022 when filing his federal income tax return.
How to report coronavirus-related distributions?
The qualified individuals will have to report any coronavirus-related distribution in the individual federal income tax return for 2020. Any taxable portion of distribution can be reported in the income of the upcoming three consecutive years.
When will form 8915-E be available?
If you’re an American taxpayer, you can get access to Form 8915-E whenever you want.
