Cares act withdrawal mistake

[ZeroNights]

Hi there, I just had a question about the cares act. I got lucky enough to keep my job during this whole pandemic, reading through the rules, I had thought I had qualified for the CARES act withdrawal and gone through fidelity. I took out about 2.9k from my investments as a withdrawal. Come to find out when I was speaking with one of my co-workers, who better explained the act to me and I do NOT qualify.

Called Fidelity and they could not cancel it transaction, informed me I have 3 years to pay it off. I'm debating just using it to help my parents out who have been affected by COVID-19 indirectly, but nothing outlined in the CAREs act. 

Any suggestions what I should do?

TLDR: I am stupid and withdrawal early. Debating about using it to help parents, but rather not commit fraud, if audit, but likelihood of being audited is tiny, but again, accidental derp on my part. Probably should return it and do a hardship loan instead.

Thank you !

[Critter-3]

Here are the rules ... you decide if you qualify ... if you don't then return the distribution by the end of the year if possible.

In general, section 2202 of the CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions.

It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.

You are a qualified individual if –

• You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

• Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

• You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

• You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

The 10% additional tax on early distributions does not apply to any coronavirus-related distribution.

Please see the IRS website: Coronavirus-related relief for retirement plans and IRAs questions and answers for further information.

The draft Form 8915-E for reporting Coronavirus-Related Distributions is here:  https://www.irs.gov/pub/irs-dft/f8915e--dft.pdf

The draft instructions are here:  https://www.irs.gov/pub/irs-dft/i8915e--dft.pdf

[ZeroNights]

Got it appreciate it! Sadly, after talking to Fidelity, they couldn't cancel the transaction and looking over the rules further and detail on every gov website, looks like I don't qualify. Will have to figure out how to get the money back in there and not spend it. 

Thank you ! 

[dmertz]

If you do not meet the qualifications to receive a Coronavirus-Related Distribution, the distribution is an ordinary early distribution and does not qualify for the options to include the distribution in equal parts over 3 years or to repay it over 3 years, despite the Fidelity rep's inaccurate statement to the contrary.  To be able to repay it over 3 years you would have to report it on 2020 Form 8915-E as a CRD, which would be fraudulent if you know you did not qualify to receive a CRD.

Assuming that this does not qualify as a CRD, if this distribution was from a 401(k) provided by an employer with which you are still employed, the distribution is apparently actually a hardship distribution that is not eligible for rollover, so you are stuck with the tax consequences, including the early-distribution penalty.  If the distribution was instead from a traditional IRA, you have 60 days from the date of the distribution to roll the distribution back into an IRA provided you have not done a similar rollover of any distributions from a traditional IRA within the 365 days preceding the date of the recent distribution.  If you did do a previous rollover that would disqualify you from rolling a traditional IRA distribution back to a traditional IRA, you could instead roll it over within 60 days from the date of the distribution to a Roth IRA as a Roth conversion.  Rolled over to a Roth IRA it would still be subject to income tax but not to the early-distribution penalty and in the Roth IRA it would grow tax free once the requirements for tax-free Roth IRA distributions is met.

[Opus 17]

You can't cancel a withdrawal, but you can return the distribution back to the original account, or deposit it into a new private IRA and call it a "rollover" within 60 days, and pay no tax.  That's part of the normal rules, you always have 60 days to return a distribution or roll it over.

If it is more than 60 days, you would have to be able to certify that it was a COVID-related distribution, then you get 3 years to return it or deposit it in a new account.

If you don't feel that you can honestly certify this was a COVID related withdrawal, and it is more than 60 days, then it is just a regular withdrawal and subject to income tax plus the 10% penalty.   But since the withdrawal was less than $3000, it's not that expensive a mistake. 

[Opus 17]

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@ZeroNights wrote:

TLDR: I am stupid and withdrawal early. Debating about using it to help parents, but rather not commit fraud, if audit, but likelihood of being audited is tiny, but again, accidental derp on my part. Probably should return it and do a hardship loan instead.

Thank you !

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Separate to the previous answers:

You should not have to do a "hardship" loan.  If this is a work plan (401k or 403b) then most of the time, you can take a loan for any reason, you don't have to certify a hardship.  (Although maybe for some employers, they only allow loans for hardships?)

With a loan you are usually required to make your repayments via payroll deductions, and as long as you make your payments, there are no tax consequences or tax reporting issues for a loan.