Your 401k COVID Withdrawal: Tax and Repayment Rules

The U.S. government’s response to the COVID-19 pandemic included relief measures for retirement savings accounts. These provisions allowed individuals facing specific hardships to access their retirement funds under special, temporary rules. The changes were designed to address the immediate financial pressures many households experienced during the initial phases of the pandemic.

Defining a Coronavirus-Related Distribution

A Coronavirus-Related Distribution (CRD) was a specific type of withdrawal from an eligible retirement plan, such as a 401(k) or IRA, permitted under the CARES Act. To be considered a CRD, the withdrawal had to be made between January 1, 2020, and December 31, 2020. The total amount an individual could designate as a CRD was capped at $100,000, aggregated across all their retirement plans. This limit was per individual, not per plan.

Eligibility for taking a CRD was tied to specific, direct impacts from the coronavirus. An individual qualified if they, their spouse, or a dependent were diagnosed with the SARS-CoV-2 virus or the COVID-19 disease. The definition also extended to those who experienced adverse financial consequences as a direct result of the pandemic, including:

• Being quarantined, furloughed, or laid off
• Having work hours reduced
• Being unable to work due to a lack of childcare
• Owning a business that had to close or reduce operating hours due to the pandemic

Taxation and Repayment Rules

The primary tax benefit of a CRD was the waiver of the 10% additional tax that typically applies to early distributions from retirement accounts for individuals under age 59½. While the withdrawal was still subject to regular income tax, the CARES Act provided a unique, now-expired option for how to report and pay that tax. Individuals could elect to include the distribution amount in their gross income ratably over a three-year period, which covered the 2020, 2021, and 2022 tax years. Alternatively, a person could choose to include the entire distribution amount in their income in 2020.

The CRD rules allowed for the repayment of the withdrawn funds. Individuals had a three-year window, starting from the day after they received the distribution, to repay any portion of the amount. A repaid amount was treated as a rollover contribution to an eligible retirement plan and was not subject to income tax. This three-year repayment period has now expired; for a distribution taken on the last possible date, December 31, 2020, the repayment window closed on December 31, 2023.

Tax Filing and Reporting Requirements

Taxpayers used Form 8915-E to report these transactions for the 2020 tax year. This form was used for officially designating a withdrawal as a CRD and for electing the three-year income spread.

For repayments made in later years within the allowable window, taxpayers used subsequent versions of the form, such as Form 8915-F. For example, if a taxpayer repaid a CRD in a later year, they would file Form 8915-F and may also need to file an amended tax return, Form 1040-X, for prior years to claim a refund. These forms remain relevant for taxpayers who may need to amend a past return.

CARES Act 401k Loan Rules

Separate from the distribution rules, the CARES Act also temporarily modified the regulations for loans from 401(k) plans. For qualified individuals, the law increased the maximum amount they could borrow for a period that began on March 27, 2020. The loan limit was raised to the lesser of $100,000 or 100% of the participant’s vested account balance.

The relief also extended to the repayment of 401(k) loans. A qualified individual with a loan repayment due between March 27, 2020, and December 31, 2020, was permitted to delay that repayment for up to one year. Interest on the loan continued to accrue during this deferral period, and the loan was re-amortized to account for the accrued interest when repayments resumed.