It’s been a while but we now have some clarity regarding distributions and loans from retirement plans under section 2202 the CARES (Coronavirus Aid, Relief, and Economic Security) Act. 

Recently issued notice 2020-50, by the federal government, outlines the manner in which income, loans, and re-contributions will be handled when filing your personal tax return.  Our newsletter will only address the notice from an individual’s perspective.  If we receive enough questions regarding the notice, as seen from an employer perspective, we will make sure we address them under a separate newsletter.

For starters, in order to qualify for special tax treatment, you must be an individual:

  • Who was/is diagnosed with COVID-19 by testing approved by the Center for Disease Control and Prevention.
  • Whose spouse or dependent was/is diagnosed with COVID-19 by testing approved by the Center for Disease Control and Prevention.
  • Who experiences (or those of their spouse or member of household) adverse financial consequences as a result of the individual being quarantined, being furloughed/laid off, or having work hours reduced due to COVID-19; the individual being unable to work due to the lack of childcare due to COVID-19; or the closing/reducing hours of a business owned or operated by the individual due to COVID-19.
  • Who had a reduction in pay, a job offer rescinded, or start date delayed due to COVID-19.

To summarize, in order to qualify, you MUST have one of the above conditions apply.  Next, the CARES Act defines a “coronavirus-related” distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020.  The CARES Act limits the amount of aggregate distributions from ALL eligible retirement plans to no more than $100,000.

Now, let’s identify some parameters with regards to distributions for qualified individuals.  

  1. You may treat a distribution as coronavirus-related as long as one of the four conditions listed above have been satisfied.  The individual will receive a report of their distribution from the eligible retirement plan on Form1099-R.
  2. An individual that is eligible for tax-free rollover treatment is permitted to recontribute, at any time in a 3-year period, any portion of the distribution to an eligible retirement plan that is permitted to accept eligible rollover contributions.
  3. The standard 10% additional tax will be waived (including the 25% additional tax usually associated with SIMPLE IRA’s).
  4. You will be permitted to spread the  distributed income over a period of 3-years.  An individual will also be able to elect-out of the 3-year inclusion and just go ahead and include the entire amount in the year of distribution. 
  5. Re-contributions of a coronavirus-related distribution may be carried back or forward when using the 3-year ratable income inclusion.

Obviously every individual will have their own set of circumstances with regards to the details of their distribution(s).  It is best that we review your specific conditions before making any tax reporting decisions.  In addition to distributions there are also some clarifications for individuals who have, or are, borrowing on their retirement accounts.   

The period applicable for individuals taking a loan from a qualified employer plan is from March 27, 2020 to before September 23, 2020.  Most notably the aggregate limit has been raised from $50,000 to $100,000.  In addition if the due date for an individual’s loan repayment falls between March 27, 2020 and ending December 31, 2020, then the due date shall be delayed for 1 year.

Should a loan be delayed during the above mentioned period the loan will then be reamortized (taking into account interest) over a period that is up to a year longer than the original term of the loan.  It should be noted that if a qualified employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, the term of the loan is extended beyond 5 years.

Complicated stuff…right?  If you have received contributions or made a loan against your qualified retirement account please take care in understanding the information in our update.  If you have further questions, or need additional clarity, please contact us and we will do our best to help you navigate the current tax environment.

Jill Kuksa & Deb Hanselmann