In response to the adverse financial impact of COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted on March 27, 2020 to provide relief for affected individuals and businesses. One of the provisions under the CARES Act eases restrictions for distributions from eligible retirement plans. But, as with any major piece of legislation- the CARES Act left many questions unanswered. The Internal Revenue Service has been providing answers to many of these questions- with Notice 2020-50 being their latest installment.
Eased Restrictions On Distributions
The CARES Act permits qualified individuals (defined later)to take coronavirus-related distributions (CRD) and avoid the usual restrictions that would hinder these distributions. A distribution qualifies as a CRD if it’s taken from an eligible retirement plan on or after Jan. 1, 2020 and before Dec. 31, 2020, by a qualified individual. An individual’s total CRDs may not exceed $100,000.
The following are some of the waivers that make it easy for account owners to take CRDs.
Eased restrictions on eligibility requirements for employer plans—Under an employer plan, which includes qualified plans and Internal Revenue Code Section 403(b), an individual must experience a triggering event to take a distribution from her account. For instance, a Section 401(k) plan document might require a participant to reach age 59½ to be eligible to take a distribution from her Section 401(k) account.
The CARES Act provides that an employer may permit a qualified individual to take a CRD, regardless of whether the individual satisfies the plan’s triggering event requirements.
Waiver of the 10% early distribution penalty—Unless the account owner qualifies for an exception, a taxable distribution from a retirement account is subject to a 10% additional tax (early distribution penalty), if the distribution occurs before the account owner reaches age 59½.
The CARES Act added CRDs to the list of exceptions.
Income may be spread over three years—Distributions from retirement accounts are generally required to be included in the income of the account owner the year in which the distribution occurs.
Under the CARES Act, CRDs are included in the account owner’s income ratably over three years, unless the taxpayer elects to include the entire amount in income for 2020.
Three-year rollover period—Generally, a distribution from a retirement account is includible in the account owner’s income, unless the amount is rollover-eligible and is rolled over within 60 days of receipt.
The CARES Act extends the rollover period to three years.
Waiver of RMDs—Individual retirement accountowners- except for Roth IRA owners- who were at least age 70½ on Dec. 31, 2019 would have been required to take required minimum distributions (RMDs) in 2020. The RMD requirement also applies to certain employer plan participants and inherited retirement accounts.
With the exception of defined benefit plans, the CARES Act waived RMDs for 2020.
No RMDs means rollover eligibility—RMDs aren’t eligible for rollover. However, as there are no RMDs for 2020, distributions taken by account owners during 2020 that would have otherwise been RMDs are eligible for rollover providing the rollover is completed within 60 days, or longer if qualified for a waiver of the 60-day period.
Enhancements, Confirmations and Clarifications
While the benefits of the above provisions are obvious, there are some outstanding questions. Notice 2020-50 answers some of these questions, and expands on the definition of “qualified individual.”
The IRS provided a list of Q&A on CARES Act retirement provisions. But that isn’t official guidance. Now, interested parties may rely of the information provided in Notice 2020-50 with confidence. This includes:
Expansion of “qualified individual”—A qualified individual for CRD purposes is an individual: who’s diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19 or who experienced adverse financial consequences, including reduced job-related income because of COVID-19.
The definition has been expanded to include the individual, or the individual’s spouse or member of the individual’s household, having a job offer rescinded or start date for a job delayed due to COVID-19. In addition, a qualified individual includes someone whose income is affected by COVID-19 because her spouse or a member of her household experiences a reduction in income or due to COVID-19.
A CRD is available, regardless of financial need—A qualified individual may take a CRD, even if that individual has no need for the funds.
A CRD from a beneficiary account may not be rolled over—A CRD may be made from an inherited retirement account. However, unlike CRDs from other retirement accounts, a CRD from a beneficiary account may not be rolled over unless the beneficiary is the surviving spouse of the decedent.
Tax reporting on CRDs—The payor is required to issue a Form 1099-R for a CRD, showing the entire amount distributed from the account. The instructions for the 2020 Form 1040 will default to spreading the income from the CRD ratably over three years and include an option to elect to include the entire amount in income for 2020.
If the payor doesn’t indicate on the 1099-R that the CRD qualifies for an exception to the 10% early distribution penalty, the tax preparer will need to claim the exception when filing Form 1040.
The one-per-year IRA rollover rule doesn’t apply—An individual who takes a distribution from an IRA and rolls over the amount to the same type of IRA, for example from a traditional IRA to a traditional IRA (an IRA-to-IRA rollover), may do so only once during a 12-month period. This limitation doesn’t apply to a CRD.
Planning Opportunities
Notice 2020-50 provides much needed clarification and opportunities. For instance, individuals who didn’t rollover RMDs because they thought that the rollovers would break the one-per-year IRA-to-IRA rollover rule, may now rollover those amounts if they qualify as CRDs. This is just a fraction of what’s covered – more details are available in Notice 2020-50.