No, there is a COVID exception to the early distribution penalty, but it is not considered as being for a Natural Disaster. Select "Another Reason" from the list of Qualified Exceptions.
There are requirements for the COVID exception:
1. The first requirement is that the distribution is made to a qualified individual. The definition of a qualified individual in Section 2202(a)(4)(A)(ii) of the CARES Act is fairly generous. A qualified individual is anyone who has been diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or has experienced adverse financial consequences due to being quarantined, furloughed, or laid off; having work hours or pay reduced; having been unable to work due to a lack of child care; having owned or operated a business that has been closed; having a reduction in self-employment income; or having a job offer rescinded or a start date delayed. An individual also qualifies if his or her spouse or a member of his or her direct household has experienced any of the above.
Additionally, a qualified individual is not required to demonstrate a true need for the funds in order to take advantage of this provision. As long as an individual has experienced adverse financial consequences for any of the reasons above, an early distribution is allowed. Similarly, distributions are not limited in amount to the extent of adverse financial consequencesexperienced.
The burden of proof falls on individuals to certify that they qualify, and employers or plan administrators are not required to verify the information unless they have actual knowledge contrary to the individual's certification. There is an example of a simple taxpayer certification in Section 2.E of Notice 2020-50.
2. The second requirement is that the distribution is made from an eligible retirement plan. Eligible plans include an IRA, 401(k), 401(a), an annuity such as a 403(a) or 403(b), and a governmental deferred compensation plan such as a 457(b). Distributions from these plans are ordinarily included in a taxpayer's gross income in the year of distribution and can ordinarily be directly rolled over.
3. The third requirement is that the distribution is made in calendar year 2020, which is straightforward.
4. The final requirement is that the aggregate distributions eligible for COVID-19 relief are not to exceed $100,000 per individual. This means a single employer or plan administrator cannot distribute in excess of $100,000 to an individual as COVID-19 relief. An individual may receive distributions from multiple unrelated plans that exceed $100,000 in aggregate, but the individual may only exclude up to $100,000 from the 10% additional tax penalty.
Provided all these conditions are met, the eligible distributions must be reported as income and are subject to income tax, but without additional tax or penalty for early distribution.
The CARES Act allows individuals to report distributions ratably over three years. This means that an individual who withdraws $30,000 in 2020 may report $10,000 of income in 2020, 2021, and 2022.
