CARES Act Allows Coronavirus-Related Relief for Retirement Plans and IRAs
By: Kyle P. Graham
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides for special rules concerning coronavirus-related distributions, rollovers, loans, and required minimum distributions for certain retirement plans and IRAs. Recently, the IRS released Notice 2020-50 and Notice 2020-51, providing additional guidance on these rules. Given the current economic uncertainty individuals are facing throughout the country, the relief provided in the CARES Act can provide a penalty-free opportunity to reach into retirement plans and access funds, provided individuals meet the requirements as explained below.
Coronavirus- Related Distributions
In general, the CARES Act provides for expanded distribution options and favorable tax treatment of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) plans, 403(b) plans, and IRAs) to qualified individuals. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020 to December 31, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. The additional 10% tax on early distributions under Internal Revenue Code (Code) Section 72(t) does not apply to any coronavirus-related distribution.
A person is considered a qualified individual if:
- He or she is diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC);
- The person’s spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the CDC;
- He or she experiences adverse financial consequences as a result of:
- Being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
- Being unable to work due to lack of childcare due to SARS-CoV-2 or COVID-19;
- Closing or reducing hours of a business that he or she owns or operates due to SARS-CoV-2 or COVID-19;
- Having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or the start date for a job delayed due to COVID-19;
- The individual’s spouse or a member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of child care due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or the start date for a job delayed due to COVID-19; or
- Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
Reporting & Repayment
Individuals may elect to report all of their coronavirus-related distributions on their individual federal income tax returns in the year of distribution or ratably over a three-year period. Individuals may also repay all or part of a coronavirus-related distribution, provided that they complete the repayment within three years after the date that the distribution was received. For example, if an individual takes a coronavirus-related distribution and he or she chooses to repay the full amount in 2022, the individual can file an amended return for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that was included in income for those years. Further, the individual will not be required to include any amount in income for 2022. Form 8915-E is used to report any repayment of a coronavirus-related distribution and to determine the amount of any coronavirus-related distribution includible in income for a year.
The CARES Act also increases the amount a plan owner can borrow. Under Code Section 72(p), loans from retirement plans cannot exceed $50,000. The CARES Act increases the allowable plan loan amount to $100,000 and permits suspension of loan payments for plan loans outstanding on or after March 27, 2020, that are made to qualified individuals.
It is anticipated that eligible retirement plans will accept repayments of coronavirus-related distributions and treat them as rollover contributions. However, eligible retirement plans are not required to accept rollover contributions and plans that do not currently accept rollover contributions are not required to change their terms or procedures to accept repayments.
Required Minimum Distribution Rules
The CARES Act enables any taxpayer with a required minimum distribution (RMD) due in 2020 to skip those RMDs for this year. Further, taxpayers who already took an RMD for 2020 have the opportunity to roll those amounts back into the retirement account. The deadline to roll over such a payment is now August 31, 2020.
Kyle P. Graham is an attorney at the Cleveland, OH-based law firm McCarthy, Lebit, Crystal & Liffman.
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