COVID-Related Distributions

Q. Can distributions be made from 403(b) plans in relation to COVID-19?

A. Yes. 

Under Internal Revenue Code Section 402(c)(8), an eligible retirement plan includes:

• An individual retirement arrangement (IRA) under Code Section 408(a) or (b).
• A qualified plan under Code Section 401(a).
• An annuity plan under Code Section 403(a).
• A 403(b) plan.
• A governmental deferred compensation plan under Code Section 457(b). 

Distributions from these plans generally are includible in the distributee’s gross income in the year of the distribution. For example: For qualified plans, Code Section 402(a) provides that any amount actually distributed to a distributee is taxable to the distributee in the taxable year of the distribution, under Code Section 72. Similar rules apply to 403(b) plans under Code Section 403(b)(1), governmental 457(b) plans under Code Section 457(a), and IRAs under Code Section 408(d)(1).

Under the Coronavirus, Aid, Relief and Economic Security (CARES) Act, enacted on March 27, 2020, qualified individuals receive favorable tax treatment regarding distributions from eligible retirement plans that are coronavirus-related distributions. 

The CARES Act provides that a coronavirus-related distribution is not subject to the 10% additional tax under Code Section 72(t) (including the 25% additional tax under § 72(t)(6) for certain distributions from SIMPLE IRAs), generally is includible in income over a 3-year period, and — to the extent the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan within a 3-year period — will not be includible in income.

Section 2202 of the CARES Act also increases the allowable plan loan amount under Code Section 72(p) and permits a suspension of payments for plan loans outstanding on or after March 27, 2020, that are made to qualified individuals.