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Plan Term... non COVID related... 10% excise?


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If a plan is terminating and the termination is not related to the COVID virus will those who take a cash lump sum be subject to the 10% early dist excise tax?  I would think they are subject to the tax because the payout was not instigated as a COVID distribution.

AND... should we offer a COVID distribution option anyway?

Its not easy being green

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Plan termination is not an exception to the 10% penalty on early withdrawals. If a participant takes a cash distribution upon plan termination and they do not meet any of the exceptions under 72(t) then the tax will apply. If they want to avoid the penalty then can roll over their distributions.

For COVID distributions, whether or not the 10% penalty is waived is determined on an individual basis. When the individual files their 2020 tax return, they will determine whether or not they were a qualified individual, and if they were, they would be able to waive the 10% excise tax. This is true regardless of whether the plan is amended to provide COVID distributions. See Notice 2020-50.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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