In late march, congress passed and the president signed the Coronavirus Aid, Relief and Economic Security Act of 2020, or CARES act. This federal action most notably includes direct cash payments to individuals, unemployment benefits and insurance, emergency grants and loans to small businesses, and bailouts for some industries. For more background, this NPR article breaks down the most high-profile benefits.
But, this $2 Trillion coronavirus response bill also includes a provision allowing participants of certain money purchase plans to take emergency withdrawals without facing a penalty. This is potentially good news for members of FPPA’s 457 plan affected by the Coronavirus.
Taking a Coronavirus-related emergency withdrawal from your FPPA 457 account
Under normal circumstances, participants who are still working can only withdraw funds without penalty under certain circumstances, including:
- Reaching a certain age: 72 years old for FPPA accounts
- Disability
- Unforeseeable emergency
- Termination of employment
However, the recently enacted CARES Act now permits a “coronavirus-related distribution” to qualified individuals. For FPPA 457 plan participants, this allows a withdrawal of up to $100,000 in account funds between January 1 and December 31, 2020. Such distributions are limited to qualified individuals, described in this explainer as someone who:
- is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention, or
- has a spouse or dependent diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention, or
- experiences adverse financial consequences as a result of (i) being quarantined, furloughed or laid off or having work hours reduced due to COVID-19, (ii) being unable to work due to lack of child care due to COVID-19, (iii) being unable to work due to closing or reducing hours of a business owned or operated by the individual due to COVID-19, or (iv) other factors as determined by the Secretary of the Treasury
Things to consider before taking an emergency 457 distribution
Of course, with everything in life, there is some red tape. In this case, considerations include choosing whether to repay their coronavirus-related withdrawals, or pay taxes on the distribution. Here are a few things to think about before taking such a withdrawal from a 457 account:
- Whether or not to repay the funds
- If the funds are not paid back, the transaction will be taxable
- If the amount withdrawn is repaid within three years, there will be no tax penalty*
- During the time that funds are withdrawn, account owners will miss out on the benefits of investment returns and compound interest for those assets
Despite these tradeoffs, this new option might be a necessary lifeline for FPPA members impacted by coronavirus and COVID-19. To learn more or get the process started, get in touch with the account holder, Fidelity.
*Each member’s situation is unique. Please consult with your tax advisor prior to taking a distribution.
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Ryan Woodhouse is the Content and Publications Manager for the Fire & Police Pension Association of Colorado. When not managing content for FPPA, Ryan can be found fly fishing in the Colorado high country or shouting at the TV during University of Wisconsin football and basketball games.