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Coronavirus-related distributions 100% taxable for New York state and local income tax purposes in 2020

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27. Under the Act, participants affected by the coronavirus may be able to take distributions in 2020 of up to $100,000 from an employer-sponsored retirement plan or an IRA. Although allowing these distributions from a qualified retirement plan is optional, we have seen that a number of employers have chosen to amend their plans to permit such distributions.

The Act provides that coronavirus-related distributions will not be subject to the mandatory 20% withholding nor the 10% early withdrawal penalty (for those younger than 59½) that would otherwise apply. In addition, participants have the option to return some or all of the funds to the plan or IRA if done so within three years, thus avoiding taxation on these amounts. To the extent funds are not redeposited within the three-year period, such amounts will be subject to ordinary income tax. The income tax due on the distribution will be spread over three years unless the participant elects to have such amounts fully taxable in 2020.

The recently passed New York state fiscal year 2021 budget puts a wrinkle on CRDs that participants may not appreciate. For tax years beginning before Jan. 1, 2022, the budget decouples New York state and New York City personal income taxes from any amendments made to the Internal Revenue Code after March 1, 2020, including the CARES Act. Simply put, CRDs will be 100% taxable for New York state and local income tax purposes in 2020. The tax bill that will come due next April could be significantly higher than what participants were expecting.

The CARES Act provides those affected by the coronavirus much needed cash. However, it is important that they understand the cost associated with these distributions. Employers should carefully consider whether to allow CRDs from the retirement plan and to the extent that they do, ensure that communications to participants clearly outline the tax implications of these distributions.

For more information, visit our COVID-19 resource page or speak with an HBS advisor at (800) 388-1963.

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