Premature Distributions from Qualified Plan

[tscott1205]

Has anyone come across anyone that did not qualify for the premature distribution exclusion due to Covid in 2020?

[qbteachmt]

What an odd question; yes and no?

Perhaps they do, in fact, qualify? Or, perhaps the distribution does not qualify?

[dascpa]

Many investment advisors told clients they could take up to $100,000 and spread the taxes over 3 years.  But they forgot to include that there must a COVID related reason for the distribution. To answer your question - yes, I've had any clients think it was an easy way to get income averaging and now they're finding out the truth.

[tscott1205]

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owned or operated a business that has been closed; having a reduction in self-employment income; or having a job offer rescinded or a start date delayed.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.

It seems this exclusion easily attainable. 

[tscott1205]

How does the program handle it. I guess it goes under line L "other" on form 5329

[qbteachmt]

"But they forgot to include that there must a COVID related reason for the distribution"

I've only seen one documented request for distribution, which is a "self-certification" anyway. Are you considering this part of due diligence, or just accepting the 1099-R?

"I guess it goes under line L "other" on form 5329"

And there is 8915-E to do.

[tscott1205]

The taxpayer told me the distribution was covid related. He was unemployed at the time and could not find work. He says he was able to pay off unsecured debt with the proceeds. I think I have done my due diligence.