IRAs and coronavirus-related distributions and repayments
ComplianceTax & AccountingJuly 02, 2020

IRAs and coronavirus-related distributions and repayments

The CARES Act includes a provision allowing an eligible individual to take a coronavirus-related distribution(s) from certain retirement plans (including IRAs) through December 30, 2020. In addition to favorable tax treatment on the distribution, the law allows amounts to be repaid to certain retirement plans within three years after having taken the distribution(s). This article has been updated as a result of the IRS’s release of Notice 2020-50 on June 19, 2020.

Updated July 2, 2020

Overview

Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (i.e., the CARES Act) which was enacted on March 27, 2020, includes a provision allowing for individuals to take coronavirus-related distributions from certain retirement plans and the potential to repay such distributions. In general, the CARES Act allows special tax treatment on up to $100,000 in aggregate distribution amounts from 401(k) plans, 403(b) plans, and individual retirement accounts (IRAs), considering that such distributions are taken during 2020 through December 30. This article is written from the perspective of the CARES Act’s impact on IRAs. On June 19, 2020 the Internal Revenue Service (IRS) released additional guidance as it relates to the CARES Act and coronavirus-related distributions. This additional guidance, in the form of Notice 2020-50, has been incorporated below.

Coronavirus-related distribution eligibility

An individual that is eligible to take a coronavirus-related distribution includes:

  • An account owner who has been, or whose spouse or dependents have been, diagnosed with either SARS-CoV-2 or COVID-19 virus by a test approved by the Centers for Disease Control and Prevention, including a test authorized under the Federal Food, Drug, and Cosmetic Act
  • An account owner that has experienced adverse financial consequences as a result of the above-mentioned viruses including someone who has:
    • Been quarantined, furloughed, laid off, or had work hours reduced
    • Been unable to work due to lack of childcare, or
    • Been affected by the close of a business or by a reduction of business hours that an individual owns or operates

Additionally, IRS Notice 2020-50 expands the list of individuals eligible to take a coronavirus-related distribution to account owners who experience adverse financial consequences as a result of:

  • Having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19
  • Their spouse or a member of the their household (i.e., one who shares the principal residence) being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19, or
  • The closing or reduction of hours of a business owned or operated by the account owner’s spouse or a member of the individual’s household due to COVID-19

Note the law and IRS Notice 2020-50 refer to eligible individuals as ‘qualified individuals’.

Taxation of coronavirus-related distributions

The CARES Act limits the amount available for special tax treatment to $100,000 in aggregate distributions from any combination of employer retirement plans and IRAs. The coronavirus-related distribution provision under the CARES Act allows an eligible individual (i.e., IRA owner or beneficiary of a deceased account owner) to include the taxable portion of a coronavirus-related distribution in his/her income ratably over a three-year period, starting with 2020. However, an eligible individual has the option of including the entire taxable portion of a distribution amount as income on his/her 2020 federal income tax return. Additionally, an eligible individual avoids the 10 percent additional tax (i.e., 10 percent penalty tax) if he/she has not yet attained age 59½.

Example 1: Jill, age 52, took a coronavirus-related distribution in the amount of $15,000 from her IRA on May 1, 2020. Rather than including the entire distribution amount on her 2020 federal income tax return she chooses to include $5,000 on her tax return for each of the next three years (i.e., tax years 2020, 2021, and 2022). Jill will report these ratable distribution amounts each year on her federal income tax return and IRS Form 8915-E which is expected to be available before the end of tax year 2020.

Example 2: Dave, age 56, who was not (nor were his spouse or dependents) affected by the coronavirus, took a distribution of $10,000 from his IRA on July 3, 2020. As Dave does not meet the eligibility criteria for his IRA distribution to be considered a coronavirus-related distribution the entire amount would be includable on his federal income tax return for 2020 unless he was eligible and completed a rollover within 60 days after the date of receipt.

Reporting coronavirus-related distributions

The IRS indicated in Notice 2020-50 that an IRA custodian/trustee must report all coronavirus-related distributions on IRS Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance contracts, etc., based on the age of the IRA owner (i.e., if taken before age 59½ - Code 1 if from a traditional IRA or Code J if from a Roth IRA). Notice 2020-50 states that code 2 (i.e., early distribution-exception applies) is acceptable but Wolters Kluwer believes this reporting is geared more toward employer retirement plans because they generally receive certifications from eligible individuals prior to making distributions.

Repayment/recontribution of coronavirus-related distributions

An IRA owner may repay to an eligible retirement plan all or part of the amounts taken from a retirement plan in 2020 under the coronavirus-related distribution provision, provided it is done within three-years after the date that the distribution was received. As a result, these repayments have the tax effect of a rollover (i.e., the amount repaid avoids federal income tax). Additionally, for repayment purposes, the ‘rollover’ of a coronavirus-related distribution will not be included in the one-per year rollover rule, and because the deadline to complete a repayment is three years after the date the distribution was received, the 60-day rollover rule will not apply.

Example 1: Jill, from an earlier example, took a coronavirus-related distribution of $15,000 from her IRA on May 1, 2020 and chose to include the distribution amount in income over a three-year period. Jill also chose to repay the full amount to her IRA in December of 2022. Jill will file amended federal tax returns 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. Jill will not be required to include any amount in her income for 2022.

Example 2: Dave, from an earlier example, took a $10,000 distribution from his IRA in 2020. As Dave does not meet the definition of an individual eligible to take a coronavirus-related distribution he is subject to the one-per year and 60-day rollover rules.

Reporting the repayment/recontribution (treated as a rollover) of a coronavirus-related distribution has not yet been clarified by the IRS. Wolters Kluwer will update this article when clear reporting requirements are released.

Conclusion

An IRA owner will need to substantiate to the IRS that he/she is eligible for a coronavirus-related distribution and not the IRA custodian/trustee. The distinction is important because the ratable taxation rules, waiver of the 10 percent penalty tax, and the relaxed repayment rules are quite different than for an IRA owner not qualified to take a coronavirus-related IRA distribution. While IRS Notice 2020-50 expanded the availability for IRA owners and beneficiaries to utilize these rules and clarified tax treatment for individuals, more guidance is necessary for IRA custodian/trustee reporting of repayments/recontributions. Look for future articles posted to Insights for any updated information regarding this specific subject matter or matters in general on the SECURE Act or CARES Act.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.

Randy Heidmann
Senior Specialized Consultant, Tax Advantaged Accounts, Compliance Center of Excellence
With more than 40 years of industry experience, Randy Heidmann has helped hundreds of financial organizations create, implement and maintain their tax-advantaged accounts programs.