The Treasury Department offered easier access to retirement savings in March 2020 as the economic hardships resulting from the COVID-19 pandemic became a forgone conclusion. Three months later, The IRS has expanded eligibility for coronavirus related distributions and provided further insight into how these new rules should be applied in Notice 2020-50.
Certain provisions in the CARES Act were enacted to reduce the tax burden on withdrawals from certain qualified retirement plans. If a withdrawal is considered a “coronavirus-related” distribution, the CARES Act extended the time to pay the resulting taxes or to recontribute the distributions back to the qualified plan, while widening eligibility for distributions and increasing possible loan amounts from qualified plans. We covered this in detail in two previous blogs in March and in June.
As the provision was originally written, Section 2202 of the CARES Act removed the 10 percent penalty on early withdrawals from certain eligible qualified retirement plans and those made for certain distributions that were considered as “coronavirus related.” A coronavirus-related distribution is limited to a $100,000 aggregated total, must be made between January 1 and December 31, 2020, and be made by someone who:
- is diagnosed with SARS-CoV-2 or coronavirus disease 2019 (COVID-19) by a test approved by the CDC;
- has a spouse or dependent who is diagnosed; or
- experiences adverse financial consequences because of the individual being quarantined, furloughed, laid off, reduced in work hours, impacted by inability to obtain of childcare, or the owner of a business impaired by the coronavirus.
Notice 2020-50 addresses some of the questions left unanswered by the CARES Act and provides further guidance regarding coronavirus-related distributions. Some of the highlights include:
- Expands 10 percent penalty exception for a coronavirus-related distribution to also include an exception for the 25 percent tax penalty on distributions from SIMPLE IRAs that have not been funded with a SIMPLE IRA contribution over the last two years
- Expands adverse financial consequences to include:
- Having pay or self-employment income reduced due to COVID-19
- Having a job offer rescinded or start date for a job delayed due to COVID-19
- The closing or reduction of hours of a business owned or operated by an individual’s spouse or a member of the individual’s household due to COVID-19
- Expands adverse financial consequences qualification to also include an individual’s spouse, or any member of the individual’s household
- a member of the individual’s household is defined as any person who shares the individual’s principal residence, regardless of a family relationship
- Confirms that qualified individuals can take distributions from a beneficiary IRA or a beneficiary account under an employer sponsored retirement plan.
It should be noted that there is no asset or means test that needs to be applied in determining if a distribution is coronavirus related.
Impact on Individual Taxes
Income from coronavirus-related distributions are generally ratably included in income over a three-year period beginning with the year of distribution. Taxes due on the withdrawn amount(s) can be ratably paid over three years from the date of the distribution.
An individual can elect to include the entire distribution in income for 2020; however, this decision cannot be reversed after the filing of an individual’s 2020 federal tax return.
Distributions are Rollover Eligible
Tax consequences of a distribution can be eliminated at any point from the day after the coronavirus-related distribution, up to a date within three years from the date of such distribution. The withdrawn funds can be recontributed by one or more contributions to any eligible retirement plan to which a rollover can be made, and the recontributed amount will no longer count as distributed income.
Income taxes will no longer be due on any portion of the distribution that was timely repaid. Recontributions of a coronavirus-related distribution may be carried back or forward when using the three-year ratable income inclusion method.
Amendments will be possible to previous income tax returns that reported some or all such income to claim refunds of previously taxed qualifying distributions taxed in prior years. Recontributions of a coronavirus-related distribution will not be treated as a rollover contribution for purposes of the one-rollover-per-year limitation.
These special rollover provisions include a distribution taken by a surviving spouse beneficiary of a deceased owner’s retirement account but do not include a non-spouse beneficiary or distributions that are part of a series of substantially equal periodic payments. However, if an individual is receiving substantially equal periodic payments and takes a coronavirus-related distribution, this will not be treated as a change to the substantially equal payments plan, when different in amount.
The $100,000 Aggregated Limit
There is a $100,000 total limit per individual per plan. If an individual receives qualifying coronavirus related distributions totaling more than $100,000, only $100,000 of the distributions can qualify for special tax treatment under the CARES Act. Amounts exceeding $100,000 are treated as an early distribution subject to the 10% additional tax, where applicable, and are not eligible for the three-year window for recontribution to an eligible retirement plan.
Mandatory 20% Federal Withholding Requirement
The mandatory 20% federal withholding requirement on plan distributions that are not direct rollovers are not applicable to coronavirus-related distributions
For plan loans made to a qualifying individual from March 27, 2020, to September 22, 2020, the limit on plan loans is increased to $100,000 (including outstanding prior loans by that individual), not to exceed that individual’s vested benefit under the plan.
For any outstanding plan loan as of March 27, 2020, any repayments that would otherwise be due from March 27, 2020, to December 31, 2020, that due date can be extended for up to one year.
Meeting Qualified Plan Provisions
Even if an employer’s plan does not formally change its provisions, qualified individuals can claim the tax benefits of the coronavirus-related distribution rules and an employer can rely on an employee’s certification that they are a qualified individual.
Spousal consent requirements for distributions are not waived because a distribution qualifies as a coronavirus-related distribution.
Income Tax Reporting
Coronavirus-related distributions and any recontributions will be reported by the recipient on new IRS Form 8915-E, which should be available by the end of 2020. Employers will continue to report all plan distributions on Form 1099-R.
Tax Warrior Perspective
Though many may be eligible to take a coronavirus-related distribution or borrow from a qualified plan, this does not mean they should. Someone taking coronavirus-related distributions or loans, intending to pay them back may not be able to for unforeseen reasons, causing unfavorable tax results. Anytime you are faced with a decision to take a distribution prematurely from a qualified retirement plan, it should be done with caution and after counsel from your financial advisors.
If you need help determining how these provisions affect you, call on us. In the meantime, please continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the coronavirus may affect your tax filing, payments, and planning.