Are we exempt from 401K early withdrawal penalty if my spouse quit job for a month because of day care closure?

[Mohit]

I and my spouse were not able to work because of day care closure.
So my spouse quit job.
After that we both took withdrawal from our 401k which is less then 100K.
She joined back some other company after a month.

Are we eligible to be exempt from 401K early withdrawal penalty?
If yes, are we both exempt from 401K early withdrawal penalty or just my spouse?

[dmertz · Accepted solution]

Yes, these circumstances qualified you and your spouse to take a coronavirus-related distribution that is exempt from the early-distribution penalty.  You'll need to wait for the IRS to release Form 8915-E for reporting CRDs and for TurboTax to implement this form.

[Mohit]

Thank you @dmertz for your reply.

Box 7 on both the Form 1099R has distribution code 1.

Is this correct?

Or we need to get it corrected to 2, which is early distribution exception applied?

https://www.irs.gov/pub/irs-drop/n-20-50.pdf

Section 3 Point A on page 11,  says

"If a payor is treating the payment as a coronavirus-related distribution and no other appropriate code applies, the payor is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. However, a payor also is permitted to use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R."

[dmertz · Accepted solution]

As indicated in Notice 2020-50, code 1 is not incorrect, so the payer will not change the code.  It's your responsibility to report the distribution as a CRD on Form 8915-E to eliminate the penalty.