The CARES Act allows for coronavirus-related distributions from retirement accounts between Jan. 1, 2020, and Dec. 31, 2020, provided the distributed amounts were no more than $100,000 or 100% of your vested account balance. The Act essentially waives the 10% early withdrawal penalty. Furthermore, the Act allowed for these distributions to be repaid at any time over three years to avoid income taxes on the distribution. However, that is about where the CARES Act stopped with guidance.
The IRS recently posted a question and answer section on their website that provides some clarification on how the IRS is handling tax issues related to the CARES Act. This article is specific to Section 2202, which grants special distribution options and rollover rules for certain retirement plans, including IRAs.
Below is a summary of new information learned, based on this update from the IRS. If you would like to read the full IRS Q&A, please follow the link: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers. The IRS and U.S. Treasury Department will be formulating official guidance on Section 2202 soon, so the IRS Q&A should not be considered “official guidance,” The IRS anticipates that guidance will be substantially similar to guidance applied to tax-favored treatment of distributions and plan loans under the Katrina Emergency Tax Relief Act of 2005.
Qualifications for up to $100,000 Coronavirus-Related Distributions:
As it stands right now, it appears the IRS is taking a limited-scope interpretation of this provision of the law. For a distribution up to $100,000 to qualify as a coronavirus-related distribution, one of the following must apply:
- You, your spouse, or dependent is diagnosed with the virus SARS-CoV-2, or coronavirus disease 2019 (COVID-19) by a CDC-approved test.
- You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off, or by having reduced work hours.
- You experience adverse financial consequences as a result of being unable to work due to a lack of childcare because of SARS-CoV-2 or COVID-19.
- You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.
Based on the wording, we believe it sounds like adverse financial consequences that are a result of other factors, although related to the coronavirus (i.e., stock market downturn, economic contraction, lack of liquidity, etc.), are not being considered as qualifications for a coronavirus-related distribution. However, the article does state that the Treasury Department and IRS may issue guidance that expands the list of factors taken into account. So, there is still hope for further expansion of this provision.
Unless you fall within one of the categories listed, it is probably best to wait to take coronavirus-related distributions until further guidance is provided or qualifying factors extended. As always, we suggest you talk with your adviser if you have questions about your specific situation.
Taxation for Coronavirus-Related Distributions:
Per the IRS, “Taxes on coronavirus-related distributions are paid ratably over a three-year period, starting with the year in which you receive your distribution.” You also have the option of reporting the entire amount of the distribution in the year of the distribution, but that would defeat the purpose of classifying it as a coronavirus-related distribution. The account custodians that we work with have indicated they are not reporting distributions any differently on your 1099-R. According to the IRS site, they expect to provide more guidance on how to report these distributions by the plan, so perhaps the custodians will be providing additional documentation. Currently, it is up to the taxpayer and/or their tax preparer to designate distributions as coronavirus related. You will use Form 8915-E (which is expected to be available by the end of the year) to report repayment of coronavirus-related distributions and to determine the amount of income to include from these distributions. We suggest speaking with your CPA or tax adviser for guidance on how to report any coronavirus-related distribution.
Timetable for Paying Back Qualified Coronavirus-Related Distributions:
The language in the CARES Act was somewhat unclear about how long you had to payback distributions from coronavirus-related distributions. The law said three-years, but never clarified when the clock started for the three-year window. This IRS posting indicates that the clock begins the date the distribution is received. We assume this means the tax year the distribution is received, so if you received the funds from a coronavirus-related distribution on June 1, 2020, you would have to pay it back by Dec. 31, 2022. Since you are paying the tax ratably over the period you held the funds out, if you waited until 2022 to pay the money back, you would have to file amended returns for 2020 and 2021 to receive refunds for the taxes paid on distributions during each of those years. Your 2022 return wouldn’t be filed until 2023, so you would not report the income from the distribution in that year.
While this helps clear up many questions, there is still some grey area out there, and it looks like the IRS plans to address this issue with official guidance soon. We will keep you updated and informed as we know more. If you have any questions about borrowing from your retirement account for a coronavirus-related reason, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: firstname.lastname@example.org
- Phone: 770-429-9166
- Join the Conversation in Our Coronavirus Facebook Group