Q. I manage a retail establishment and we need to meet a company quota to get a bonus. We did not meet our quota. However, the company gave us 70% of our bonus instead of the 100%. I am assuming COVID affected our sales. I withdrew money from my 401(k) as a COVID distribution and I want to use the funds to pay some of my daughter’s college loan and probably for a down payment on a home. I have no way of proving that. Should I be paying the 10% penalty on my 401(k) because I have no way of proving the bonus was smaller because of COVID?
— Figuring it out
A. Yours is a great question.
Under the CARES Act, qualified individuals who made early withdrawals from their 401(k) in 2020 prior to reaching age 59 ½ are not subject to a 10% early withdrawal penalty, though income taxes are still owed.
So do you qualify?
Congress established some broad definitions, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.
A qualified individual is:
- Anyone who has been diagnosed with COVID-19 by a test approved by the CDC 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- Or having a job offer rescinded or a start date delayed.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 those items, DeFelice said.
“Additionally, a qualified individual is not required to demonstrate a true need for the funds in order to take advantage of this provision,” he said. “As long as an individual has experienced adverse financial consequences for any of the reasons listed, an early distribution is allowed.”
The amount of the distribution is not limited to the extent of adverse financial consequences experienced, he said.
“Though the requirements are fairly liberal, I am not sure that only getting 70% of your expected bonus instead of the 100% you are used to when quotas are met will qualify you under the CARES Act,” he said.
However, you may qualify for a hardship withdrawal, he said.
“A hardship withdrawal is a distribution of funds from a retirement plan due to `an immediate and heavy financial need,’ and is not subject to an early withdrawal penalty,” he said.
Generally, these things qualify for a hardship withdrawal:
- Medical bills for you, your spouse or dependents.
- Money to buy a house that is your principal residence (not a vacation/second home and not just to make mortgage payments).
- College tuition, fees, and room and board for you, your spouse or your dependents.
- Money to avoid foreclosure or eviction.
- Funeral expenses.
- Certain costs to repair damage to your home.
Your employer’s plan administrator usually decides if you qualify for a hardship withdrawal or not, he said.
“Be aware that you may need to explain why you couldn’t get the money elsewhere and were forced to tap your 401(k),” DeFelice said.
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.