Updated March 2427, 2020
Withdrawals and Loans from Retirement Accounts for COVID19 Expenses
The economic repercussions of COVID-19 could reduce
Americans’ economic security; in response, individuals
may view their retirement accounts as a source of funds to
help meet current expenses. They may be able to withdraw
from their defined contribution (DC) retirement accounts
(such as 401(k) plans, 403(b) plans, and the Thrift Savings
Plan (TSP)) or from their Individual traditional or Roth Individual
Retirement Accounts
(IRAs). In addition, DC plans may
allow participants to
borrow from their accounts.
Withdrawals from Retirement Accounts
In general, withdrawals from DC plans are not allowed until
retirement. However, DC plans may allow individuals to
withdraw funds for a financial difficulty, referred to as a
hardship distribution. Withdrawals from traditional or Roth
IRAs are allowed
for any reason.
Individuals who take a hardship distribution from a DC
plan or withdraw from an IRA (1) must include the taxable
portion of the distribution in that year’s taxable income and
(2) may face a 10% penalty on the amount withdrawn. The
penalty is meant to discourage the use of retirement account
funds for preretirement purposes. The penalty does not
apply if the individual is aged 59½ years or older, or if the
reason for the distribution is listed in 26 U.S.C. § 72(t).
Loans from DC Plans
Loans may be preferred to early withdrawals because (1)
proof of financial hardship is not required, and (2) amounts
borrowed are repaid to the individual’s account. However,
in the case of a loan default (i.e., following job loss if the
borrower fails to repay the outstanding loan balance by the
deadline for that year’s tax return), the loan balance must be
included in taxable income, and a 10% tax penalty applies.
Loans are not permitted from IRAs.
Hardship Distributions Under Current
Law and Regulations
Provisions for hardship distributions under current law and
regulations include the following:
PlansDC plans may allow—but are not required to offer—
hardship distributions.
If DC plans allow hardship distributions, the plan document
document must specify which situations qualify as
hardship.
Individuals must demonstrate that they are experiencing
immediate and heavy financial need to take a hardship
distribution and that the amount withdrawn does not
exceed the financial need.
Certain distributions are deemed to be made on account
of immediate and heavy financial need. The individual
does not have to demonstrate financial need if the
distribution is for one of seven specified situations (26
C.F.R §1.401[k]-1[d][3][B](k)-1(d)(3)(B)).
Among other reasons, these deemed hardship
distributions include
tuition, fees, and other expenses for the next
12 months of post-secondary education (this
appears to exclude student loan repayments),
certain medical expenses in excess of 7.5% of
adjusted gross income that would be
deductible under 26 U.S.C. § 213(d),
payments necessary to prevent eviction or
foreclosure for a principal residence,
burial and funeral expenses for an individual’s
parent, spouse, child, or dependent, and
expenses and losses due to a disaster declared
under the Robert T. Stafford Disaster Relief
and Emergency Assistance Act (P.L. 93-288 ),
“provided that the employee’s principal
residence or principal place of employment at
the time of the disaster was located in an area
designated by FEMA [the Federal Emergency
Management Agency] for individual
assistance with respect to the disaster.”
Hardship Distributions for COVID-19
Related Expenses
It is unclear whether distributions for COVID-19 related
expenses (other than the first four situations in the above
bullet points) would be allowed under the hardship
distribution distribution
regulation for disaster assistance. The
regulation specifies
that hardship distributions are allowed
for employees in an
area designated for individual
assistance as a result of a
FEMA disaster declaration. In
response to COVID-19,
President Trump issued an
emergency declaration under the
Stafford Act. In addition,
FEMA indicated that the
“declaration does not make direct
financial assistance available to individuals.”
available to individuals.” A number of states have received
disaster declarations, although it is unclear if individual
assistance has been approved for these states. For more
information on the emergency declaration issued by
President Trump in response to COVID-19, see CRS
Insight IN11251, The Stafford Act Emergency Declaration
for COVID-19.
https://crsreports.congress.gov
Withdrawals and Loans from Retirement Accounts for COVID-19 Expenses
Loans Under Current Law and
Regulations
Provisions for DC plan loans under current law and regulations
regulations include the following:
DC plans may allow—but are not required to offer—
loans.
The maximum loan amount is the lesser of half of the
participant’s vested account balance or $50,000.
Loans must be repaid in level installments over five
years. Longer terms are permitted if the loans are used
for the purchase or construction of a principal residence.
Policy Options
sponsoredrules for early withdrawals and loans from employersponsored retirement plans for qualified individuals.
Qualified individuals are defined as (1) any individual or
individual with a spouse or dependent who tested positive
for COVID-19, (2) any individual facing financial
difficulties due to being quarantined, furloughed, laid off,
or unable to work due to lack of child care or due to
reduced work hours, and (3) any individual whose business
closed or reduced hours as a result of COVID-19. For
qualified individuals, the provisions would
allow for penalty-free distributions of up to $100,000
from the date of the bill’s enactment
from January 1, 2020, through December
31, 2020,
increase the maximum loan limit from $50,000 to
$100,000 for 180 days after the bill’s enactment, and
Congress and the Internal Revenue Service (IRS) have
several policy options that could provide relief for COVID19 related withdrawals and loans.
Congress Could Exempt COVID-19 Related
Expenses from the 10% Penalty
Congress could allow for distributions from retirement
plans for COVID-19 related expenses and exempt
distributions for such such
expenses from the 10% penalty that
applies to early
withdrawals. In some instances, as part of
past disaster
relief, Congress allowed for penalty-free
distributions to
individuals affected by natural disasters.
Congress also
allowed these individuals to (1) include the
distribution in
taxable income spread over a three-year
period and (2) recontribute
the distribution amount to their
retirement account. Finally,
Additionally, Congress has allowed
plans to amend plan documents
retroactively. Disaster
distributions have been generally
defined as distributions in
a specific geographic area.
COVID-19 related distributions
could similarly be defined,
or limited to individuals with
specified expenses, or could
or circumstances, or such distributions
could be unrestricted.
Congress Could Adjust Loan Requirements
Congress could adjust any of the loan requirements, such as
increasing the maximum loan amount or extending the
repayment period.
Internal Revenue Service (IRS) Could Deem
COVID-19 Related Expenses as Hardship
In the absence of Congressional action, the IRS could issue
regulations that specifically deem COVID-19 related
expenses as qualifying for a hardship distribution. Should
this occur, retirement plans that wishseek to (1) start offering
hardship distributions or (2) include COVID-19 related
expenses as a qualifying hardship situation would need to
amend their plan documents.
Legislative Proposals in the 116th
Congress
Section 21032202 of Division BA of S. 3548H.R. 748, the “Coronavirus
Aid, Relief, and Economic Security Act,” or “CARES Act,”
as introducedpassed by the Senate on March 19, 2020, and 26, 2020, and by the
House on March 27, 2020, as well as Section 401 of
Division T of H.R. 6379, “The the “Take Responsibility for
Workers and Families Act,” as introduced on March 23,
2020, contain nearly identical provisions that would modify
rules for early withdrawals and loans from employer-
extend the due date by one year for DC plan loans that are
due
are in repayment from the date of the bill’s enactment through
through December 31, 2020.
Under the proposal, individuals who take a COVID-19
distribution would include the amount in taxable income
and could report it as income either in the year received or
spread equally over three years. Alternatively, part or all of the
the distribution could be repaid to the retirement plan within
within three years of receiving the distribution.
Policy Considerations
Allowing individuals early access to their retirement funds
might help people facing financial difficulties. Some
temporary relief might be justified, particularly given
current economic concerns. Allowing early access to
retirement accounts also may have drawbacks. First, funds
that individuals take from their retirement accounts to pay
for current expenditures will not be available when the
individuals retire and would not accrue investment returns
in a potential market recovery. This is a concern because
for some
because many households rely on a combination of Social Security
Security and withdrawals from their retirement accounts as income
income sources in retirement. Second, suspending the
penalty on
withdrawals would not help individuals who are not
not permitted hardship or early withdrawals from their
retirement accounts.
For More Information
CRS In Focus IF11369, Early Withdrawals from
Individual Retirement Accounts (IRAs) and 401(k) Plans
CRS Report R40828, An Analysis of Borrowing From
Defined Contribution Retirement Plans
CRS Report R46279, The Coronavirus Aid, Relief, and
Economic Security (CARES) Act—Tax Relief for
Individuals and Businesses
John J. Topoleski, Specialist in Income Security
Elizabeth A. Myers, Analyst in Income Security
https://crsreports.congress.gov
IF11472
Withdrawals and Loans from Retirement Accounts for COVID-19 Expenses
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11472 · VERSION 1 · NEW2 · UPDATED