This post was researched and written by Kelsy Shay, a 2020 Summer Associate, with review from ERISA attorney, Jana Weiler.
In a prior blog post, we discussed the changes for retirement accounts coming from the CARES Act. The IRS recently released Notice 2020-50 and Notice 2020-51 to provide guidance and clarify some of those changes. The guidance is useful for both individuals as well as plan sponsors relating to COVID-19 distributions, loans, and recontributions.
Expansion of Qualified Individuals
The CARES Act allows emergency withdrawals from retirement accounts for individuals impacted by COVID-19. Initially, the IRS indicated those impacted by COVID-19 included:
- individual testing positive for COVID-19
- individual’s spouse or dependent testing positive for COVID-19
- individual experiencing adverse financial consequences due to quarantine, furlough, a reduction in hours, being unable to work due to lack of childcare, or closing or reduced hours for entrepreneurs
The new guidance will allow more individuals to qualify for the emergency withdrawal. It expands the category of people facing adverse financial consequences to include any member of the individual’s household. If any member of the participant’s household (those who share the principal residence) has adverse financial consequences, the participant can take a qualifying emergency withdrawal. The IRS has not defined “adverse financial consequences,” but presumably this means financial difficulties, and as discussed below, the individual can self-certify to this. Additionally, the new guidance indicates a reduction in pay, having a job offer rescinded, or delay in start date will also qualify.
The new guidance clarified that an employer may rely on self-certification from the impacted participant unless the employer has actual knowledge otherwise, but the employer is not required to inquire into whether an individual has satisfied the conditions. Notice 2020-50 includes an example of an acceptable certification for employers to ask participants to sign.
Treatment of Distributions and Loans
The employer and the participant are not required to classify distributions the same. For example, the participant may decide to treat a regular, periodic distribution as a coronavirus-related distribution (if it meets the definition) even if the plan sponsor does not classify the distribution that way. These distributions do not have to be solely due to a need arising from COVID-19 to be treated as a qualifying distribution. Anyone who qualifies to take a withdrawal may treat it as such.
The employer may decide whether, and to what extent, to treat distributions as coronavirus-related, regardless of how the individual treats the distribution or loan. However, the plan must be consistent in its treatment of similar distributions.
Employers can also choose whether, and to what extent, to adopt the new loan rules for their plan. Notice 2020-50 provides a safe harbor for employers if they decide to suspend repayment of plan loans.
Required Minimum Distribution Recontributions and Rollover
Our prior blog post indicated required minimum distributions (RMDs) are not required in 2020. Notice 2020-51 indicates certain RMDs already taken in 2020 may be recontributed or rolled over into another retirement account, if completed by August 31, 2020. This is an extension of the typical 60-day deadline. A repayment to the same IRA will not be treated as a rollover for purposes of the one rollover per 12-month limitation.
The IRS answers numerous questions relating to RMDs as a result of the CARES Act in Notice 2020-51. The notice also contains a sample plan amendment for a plan sponsor to decide whether or not RMDs will still be distributed in the absence of an election by the participant.
Plans must report a coronavirus-related distribution on Form 1099-R. Reporting is required regardless of whether it is a qualified distribution or if the funds are recontributed to the plan. The burden is on the recipient to report and treat the distribution appropriately.
Individuals receiving coronavirus-related distributions will use Form 8915-E to report distributions and any recontribution. This form is expected to be available by the end of 2020.
For income tax purposes, coronavirus-related distributions may be spread equally over three years beginning in the year of distribution, or the individual may include the entire amount of the distribution as income in the year received. An individual must treat all coronavirus-related distributions received in one taxable year consistently (all either upfront or over three years). If an individual dies before the full distribution has been included as taxable income, the remainder must be included in the taxable year of the individual’s death.
Recontributing a Distribution to the Plan
The CARES Act allows a participant who took a coronavirus-related distribution to recontribute up to the full amount of the distribution back to the plan. The recontribution can be made over the three-year period beginning the day after the distribution. When using the three-year ratable income inclusion, recontributions of coronavirus-related distributions may be carried back or forward, if, for example, more was recontributed in a particular year than what was included in income for that year. The payback would be reported on Form 8915-E. Notice 2020-50 has numerous examples illustrating the income tax treatment of distributions and repayments.
Depending on the initial treatment of the distribution and timing of payback, the taxpayer may need to amend prior tax returns to show a coronavirus-related contribution was recontributed and properly exclude the distribution from income.
Notice 2020-50 and Notice 2020-51 provide needed guidance and clarification on the implications and treatment of coronavirus-related distributions from retirement plans. Plan sponsors considering amending their plans to include the allowable changes should consult their attorney to make the amendments and ensure they operate the plan appropriately.
Additionally, participants considering taking a coronavirus-related distribution should review the guidance and consult a tax attorney to understand the impact of any actions.
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