For those impacted by COVID-19, retirement accounts can be a source of funds desperately needed, hopefully as a last resort. The CARES Act passed on March 27, 2020, provides financial relief related to distributions from retirement accounts and retirement plan loans for further details, please see:
- Individual Tax Provision Changes Under the CARES Act
- Impact of the CARES Act on Employee Benefit Plans
The IRS has now issued reporting guidance for qualified individuals, employers, and eligible retirement plans while also expanding on those who are eligible to take COVID-19 related distributions (CRD) and loans.
Additional Qualified Individuals
IRS has expanded the definition of individuals who are qualified to take a CRD or plan loan to now include:
- An individual, (new) an individual’s spouse or a member of the individual’s household (someone who shares the individual’s principal residence) who experiences adverse financial consequences as a result of:
- Being quarantined.
- Being furloughed or laid off.
- Having work hours reduced due to COVID-19.
- Being unable to work due to a lack of childcare due to COVID-19.
- The closing or reducing hours of a business owned or operated by the individual, (New) individual’s spouse or a member of the individual’s household due to COVID-19.
- (New) Having a reduction in pay or self-employment income or having a job offer rescinded or the start date for a job delayed due to COVID-19.
Guidance for Individuals Receiving a COVID-19 Related Distribution (CRD)
Reduction of Plan Loan Amount- The reduction in a qualified individual’s retirement account balance in the satisfaction of a plan loan is eligible to be treated as a CRD.
Income Inclusion for CRDs- The taxable portion of a qualified individual’s CRD is included in income ratably over 3-years or the individual can elect out of the 3-year spread and include the full amount in income in the year of distribution. Whichever approach the individual takes, all CRDs must be reported the same way for that tax year.
Tax Treatment of Recontributions of CRDs- If a CRD is eligible for tax-free rollover treatment, a qualified individual can recontribute any portion of the CRD to an IRA or retirement plan that accepts rollovers at any time in the 3-year period beginning the day after the date of the CRD. This recontribution will not be treated as a rollover contribution for the once-per-year rollover limitation.
Tax Treatment of Recontributions of a CRD Made to a Taxpayer who Uses the 1-year Income Inclusion Method- Any amount recontributed in the 3-year period reduces the amount included in income in the year of distribution when reporting the CRD lump-sum. The qualified individual reports the recontributed amount on a new Form 8915-E (to be released by the end of 2020). If the recontribution occurs before the due date of their tax return, including extensions, for the year of distribution, they include Form 8915-E with that tax return. If the recontribution occurs after the filing of that year’s tax return, they must file an amended return for that year and include Form 8915-E with the amended return.
Tax Treatment for Year of Recontribution of a CRD Made to a Taxpayer who Uses the 3-year Spread- Any amount of the CRD that is recontributed before the due date, including extensions, of a tax return in the 3-year period will reduce the ratable portion of the CRD that is includible in income for that tax year.
Recontributions of a CRD may be Carried Back or Forward when Using the 3-year Spread- If the recontributed amount exceeds the ratable portion includible in income for that tax year, the excess is permitted to be carried forward to reduce the amount of the spread includible in income the next tax year of the 3-year period.
Alternatively, the qualified individual is permitted to carry back the excess recontribution to a prior tax year(s) in which they reported CRD income. In that case, they would need to amend the prior year’s tax return(s) and report the excess recontributed amount on the new Form 8915-E to reduce their gross income by the excess recontributed amount.
CRDs Will Not be Treated as a Change in Substantially Equal Periodic Payments (SEPPs)- The receipt of a CRD by an individual receiving SEPPs will not be treated as a change in SEPPs.
Guidance for Employers
Criteria for Plan Distributions and Treatment of Distributions as CRDs- The CARES Act does not change the rules for when plan distributions are permitted to be made from an employer retirement plan. If a distribution is otherwise permitted by the terms of the plan (i.e. an in-service withdrawal), the qualified individual can treat it as a CRD on their tax return even if the plan does not. An employer is permitted to choose whether and to what extent to treat distributions under its plans as CRDs, as well as whether to provide CRD loan provisions. The employer could choose to change its plan to allow CRDs but might choose not to change the plan loan or repayment provisions.
The plan is permitted to develop any reasonable procedures for identifying which distributions are treated as CRDs but must be consistent in its treatment of similar distributions. The plan administrator may rely on the individual’s certification that they are a qualified individual unless the administrator has actual knowledge to the contrary.
CRD Tax Reporting- A CRD is reported on Form 1099-R with either a code 2 or 1.
Eligible Rollover Distribution Rules Are Not Applicable- The rules for eligible rollover distributions do not apply to CRDs from an employer retirement plan. Therefore, the plan is not required to offer the qualified individual a direct rollover with respect to the distribution, nor provide the notice. There is no required 20% withholding. However, the CRD is subject to the voluntary withholding requirements.
Permitted Cancellation of Deferral Election Under a Nonqualified Deferred Compensation Plan- If a qualified individual receives a distribution from an eligible retirement plan as a CRD, that distribution will be considered a hardship distribution. As a result, a nonqualified deferred compensation plan may provide cancellation of the individual’s deferral election. The deferral election must be canceled, not just postponed or otherwise delayed.
Retirement accounts can serve as a resource for those facing financial challenges due to COVID-19. However, tapping them now can leave your funds short for getting you through all the years of retirement. Please consider all other resources and strategies first and only turn to your retirement accounts as a last resort. Please consult with your financial and tax advisor for further guidance.
Your Bonadio Team is Here to Help.
Please consult with your financial and tax advisor for further guidance. We can help you stay current with changing regulations.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.