As stimulus machinations continue in Washington (the $1.6 trillion bill failed to advance for a second time Monday afternoon after being blocked by Senate Democrats), 401k withdrawals remain front-and-center in the relief fight.
In a section titled “Tax-Favored Withdrawals from Retirement Plans” the Coronavirus Aid, Relief, and Economic Security (CARES) Act establishes special rules for certain tax-favored withdrawals from retirement plans.
More specifically, it spells out when and how the 10% early withdrawal penalty can be avoided under Section 72(t) of the Internal Revenue Code.
“[T]he aggregate amount of distributions received by an individual, which may be treated as coronavirus-related distributions for any taxable year, shall not exceed $100,000,” the proposed bill states.
Employing a high-degree of legalese, the bill continues:
“If a distribution to an individual would be a coronavirus-related distribution, a plan shall not be treated as violating any requirement of the Internal Revenue Code of 1986 merely because the plan treats such distribution as a coronavirus-related distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $100,000.”
Coronavirus defined
For the purposes of the bill, the term ‘‘coronavirus-related distribution’’ means any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020, to an individual who is diagnosed with the virus by a test approved by the Centers for Disease Control and Prevention.
A spouse or dependent who also is diagnosed with the virus, or experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease is also eligible.
Being unable to work due to lack of childcare due, closing or reducing hours of a business owned or operated by the individual, or other factors “as determined by the Secretary of the Treasury” also qualify.
Tempers flared
Monday’s Senate debate was marked by partisan rancor after the first attempt at the bill’s passage failed over the weekend.
Senate majority Leader Mitch McConnell, R-Ky. had strong words for Democrats, at one point noting, “It is time for Democrats to stop playing politics and step up to the plate,” McConnell added.
According to The Hill, when Sen. Susan Collins, R-Maine, tried to get permission to speak, Minority Leader Charles Schumer, D-N.Y., objected.
“This is unbelievable,” Collins could be overheard saying on the floor, before going to consult with GOP leadership.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
