As the COVID - 19 pandemic arrived on the nation's shores, Congress discussed ways to pump cash and activity into an economy being ravaged by a microscopic assailant. Many of the levers that are usually used to prop up an ailing economy would likely be less effective in an environment where the number of inactive businesses is as significant as the number of unemployed people. Accordingly, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116 - 136 , to quickly provide relief, including to allow cash from retirement plans — where it might normally be untouchable for decades except at the cost of significant taxes and penalties — to flow into the hands of individuals and families.
This item discusses the 2020 changes to retirement plan distributions and loans made by the CARES Act, as well as tips to take the most tax - efficient advantage of those changes.
The CARES Act creates and describes a specific kind of distribution from qualified retirement plans called a " coronavirus - related distribution." Although the distribution must meet all the qualifications to get the benefits of that label, in reality, only the qualifications listed in bullet points 3 and 4 below are exceptional as far as retirement plan distributions go, and their broad language will likely describe many taxpayers' situations. The CARES Act specifically provides that a participant may " self - certify " his or her status as a "qualified individual," and plan sponsors do not need to perform any due diligence on the certification unless they have actual knowledge that contradicts the participant's self - certification .
A coronavirus - related distribution is (CARES Act §2202(a)(4)):
Furthermore, a taxpayer is limited to $100,000 of coronavirus - related distributions (CARES Act §2202(a)(2)(A)). Notwithstanding that a 2020 distribution otherwise meets the definition of a coronavirus - related distribution, the amount of such a distribution exceeding $100,000 will be treated according to the Internal Revenue Code section that normally applies.
For the individual taxpayer and tax preparer, the mechanics of reporting coronavirus - related distributions will presumably be similar to reporting other qualified disaster retirement plan distributions and repayments in years prior to 2020. Although the payer of the distribution can choose whether to treat a distribution as a coronavirus - related distribution, ultimately, the individual taxpayer will designate distributions as coronavirus - related by filing Form 8915 - E , Qualified 2020 Disaster Retirement Plan Distributions and Repayments, which is expected to be available before the end of 2020 (Notice 2020 - 50 ). Form 8915 - D , Qualified 2019 Disaster Retirement Plan Distributions and Repayments, had sections or columns to report total retirement plan distributions by type of plan (i.e., IRAs, Roth IRAs, and all other qualified plans) and allowed taxpayers to designate how much of the distributions from each type of plan they were designating as a qualified disaster distribution.
As shown below, a distribution that meets the definition of a coronavirus - related distribution carries several advantages and tax planning opportunities.
There are several differences in how coronavirus - related distributions are treated compared to how the distributions would be treated outside the CARES Act.
First, the early - distribution penalty will not apply to any coronavirus - related distribution (CARES Act §2202(a)(1)). In practice, this provision of the act supplements the comparatively narrow, limited list of exceptions to the additional tax on early retirement plan distributions (Sec. 72(t)(2)), such as those made for qualified higher education expenses and adoption expenses (Secs. 72(t)(2)(E) and (H)). Notably, in contrast to the some of the early - distribution penalty exceptions, coronavirus - related distributions do not have to be spent on anything specific. As long as the taxpayer has experienced adverse financial consequences as a result of the COVID - 19 pandemic, the taxpayer is free to use the funds from the distribution as he or she pleases.
Next, the customary 60 - day period to repay an eligible rollover distribution is extended to up to three years for repayment of coronavirus - related distributions that also meet the normal rollover contribution requirements in Secs. 402, 403, 408, and 457 (CARES Act §2202(a)(3)(A)). For example, distributions of inherited IRA funds are not eligible for rollover. In essence, the CARES Act does not change the definition of a qualified rollover so much as it extends the period allowed between when the coronavirus - related distribution is taken and when the funds are recontributed to a qualified plan. To report a rollover that occurs after the tax return is filed for a year that a coronavirus - related distribution is recognized as income, the taxpayer will need to file an amended tax return for the relevant year (Notice 2020 - 50 ).
In addition, as opposed to the normal rules that call for the inclusion in gross income of a retirement plan distribution in the year it is paid, a taxpayer has two choices regarding a coronavirus - related distribution (CARES Act §2202(a)(5)):
Practice tips :
For example, if a taxpayer took $100,000 of coronavirus - related distributions and did not elect to recognize the entire amount as income in 2020, he or she would be required to recognize $33,333 in each year of 2020, 2021, and 2022. A taxpayer who makes a rollover or recontribution of $33,333 in August 2021, after the taxpayer's 2020 tax return has been filed, will not be required to recognize any of the coronavirus - related distribution on his or her 2021 tax return.
Furthermore, if the same taxpayer made another rollover or recontribution of $33,333 in September 2021, he or she would have the choice of amending the 2020 tax return to reduce the recognition of that year's coronavirus - related distribution, or carrying it forward to 2022 to eliminate the recognition of that year's pro rata coronavirus - related distribution.
The CARES Act provides a waiver of required minimum distributions (RMDs) required to be made in 2020 from IRAs under Sec. 408, individual retirement annuities, Sec. 401(k) plans, qualified annuity plans, Sec. 457(b) plans, and annuities purchased by Sec. 501(c)(3) organizations (CARES Act §2203). This includes RMDs normally required to be taken by either the owner or the beneficiary. Since the CARES Act was not signed into law until March 27, 2020, the IRS provides relief for taxpayers who had already taken their RMDs prior to the signing of the CARES Act by extending the rollover period from 60 days to Aug. 31, 2020 (Notice 2020 - 51 ).
Normally, the Code disallows rollover contributions in the amount of an individual's RMD for the year (Sec. 401(a)(9)). At first glance, the CARES Act would seem to have provided an opportunity for an enterprising taxpayer of retirement age to effectively take a three - year , interest - free loan at Treasury's expense by taking a 2020 coronavirus - related distribution in the amount of what would have been his or her RMD and rolling over or recontributing that amount over the course of the next three years. However, in response to a similar RMD waiver in 2009, in the Worker, Retiree, and Employer Recovery Act of 2008, P.L. 110 - 458 , Congress recognized this potential tax tactic and added language to the Code to prevent a rollover or recontribution of an amount that would have been included in a taxpayer's RMD (Sec. 402(c)(4)).
Practice tip: With the waiver of 2020 RMDs, the temporary removal of the NOL taxable income limitation, and the temporary removal of the percentage of the adjusted gross income (AGI) limitation on charitable contributions (CARES Act §2205(a)(1)), a taxpayer who would otherwise make a qualified charitable distribution for 2020 under Sec. 408(d)(8) should consider whether it would be more advantageous to instead contribute the amount directly to a charity from the taxpayer's other funds.
The normal limitation on loans from qualified plans is the lesser of (1) $50,000, with an adjustment for multiple loans taken out in subsequent years, or (2) the greater of $10,000 or one - half of the present value of the retirement account (Sec. 72(p)(2)). For loans taken by a qualified individual between March 27, 2020, and Sept. 22, 2020, the CARES Act increases the limitation to the lesser of $100,000 or 100% of the present value of the retirement account (CARES Act §2202(b)(1)).
In addition, the CARES Act allows employers to modify plans to delay repayment of plan loans borrowed between March 27, 2020, and Dec. 31, 2020, by up to one year (CARES Act §2202(b)(2)). Unless the proceeds from the retirement plan loan are used to purchase a primary residence, plan loans are normally required to be fully repaid within five years, with payments made on a quarterly schedule, at a minimum (Sec. 72(p)(2)(B)). Under a safe harbor for employers that choose to allow delayed repayments, any repayments that would normally have been scheduled to have been made between March 27, 2020, and Dec. 31, 2020, can be delayed by up to a year, effectively making the term of the loan last longer than the customary five years. Loan repayments need to resume after the end of the suspension period (Notice 2020 - 50 ).
Like the definition of a coronavirus - related distribution, both changes to loans from qualified plans assume that the taxpayer taking the loan is a qualified individual experiencing adverse financial consequences from COVID - 19 .
The COVID - 19 pandemic has altered the financial landscape of the young professional, the former executive who is supposed to be enjoying his or her golden years, and everyone in between. Eventually, life will return to some semblance of normalcy. In the meantime, Congress has given taxpayers a timely lifeline to see themselves through this challenging environment. It is up to taxpayers and their tax preparers to make use of these provisions in the most tax - efficient manner.
Editor Notes
Marcy Lantz, CPA, CSEP, is a partner with Aldrich Group in Lake Oswego, Ore. Ms. Lantz would like to thank the following practitioners for their help editing the December Tax Clinic: Michael T. Odom, CPA, CVA, partner at Fouts & Morgan CPAs PC in Memphis, Tenn.; Carolyn Quill, CPA, J.D., LL.M., principal at Thompson Greenspon CPAs & Advisors in Fairfax, Va.; Kristine Boerboom, CPA, CMA, MBA, partner at Wegner CPAs in Madison, Wis.; and Todd Miller, CPA, partner at Maxwell Locke & Ritter in Austin, Texas.
For additional information about these items, contact Ms. Lantz at 503-620-4489 or mlantz@aldrichadvisors.com.
Contributors are members of or associated with CPAmerica, Inc.