COVID-19 Update: Additional Guidance on Taking Coronavirus-Related Distributions from IRAs and Employer Plans

Posted By: Jordon Rosen, CPA, AEP

The IRS recently issued Notice 2020-50 which provides further guidance and rules for taxpayers who take coronavirus-related distributions (CRDs) from their IRA or employer retirement plans. Here is what you need to know now.

The CARES Act passed by Congress back in March, provided taxpayers the ability to take CRDs from their IRA or employer retirement plan, without penalty, if they met certain criteria. The criteria could include being diagnosed with COVID-19 (including their spouse or dependent), suffering from adverse financial consequences due to being quarantined, having to care for dependents due to lack of daycare, or closing or reduced hours of a business owned or operated by the individual due to COVID-19. Affected individuals, including beneficiaries of inherited accounts and those taking a series of periodic payments under Section 72(t), can designate distributions up to $100,000 (aggregated) taken on or after 1.1.2020 and before 12.31.2020 as CRDs and use the funds for any reason, not just those related to COVID-19. Furthermore, an individual could avoid being taxed on the distributions if they were repaid to a qualified retirement account within 3 years starting from the day after the date of the distribution. Alternatively, the individual could report the entire amount of distributions as income in 2020 or spread the income ratably over 2020, 2021, and 2022.

Notice 2020-50 provides the following updated guidance:

  • Expands the factors which qualify an individual for the CRD to include someone who has their pay (or self-employment income) reduced due to COVID-19 or has had a job offer rescinded or their employment start date delayed due to the pandemic.
  • Expands the definition of “affected individual” to include those who suffer an adverse financial hardship by reason of a spouse or member of the individual’s household (including a roommate) being affected by the loss of income factors as defined above for the taxpayer.
  • Confirms that although a non-spouse beneficiary of an inherited account (i.e. inherited IRA) is eligible to take a CRD, they are not eligible to repay the CRD and avoid taxation and must pay tax on the distributions either in the year of distribution (2020) or ratably over a 3-year period.
  • Creates new Form 8915-E to be completed by individuals for the year they recontribute CRD amounts to a qualified plan. The Notice also states that if any or all of the CRD is recontributed back before the individual timely files their tax return for the year (including extensions) that the amount that otherwise would be included in income does not get reported on the return. If the CRD is recontributed after the return is filed, the amount is to be reported on the tax return and the individual would need to file an amended return which includes an amended Form 8915-E, to claim a refund.
  • Clarifies that if an individual is spreading the CRD amount over 3 years and then recontributes an amount in excess of the amount required to be reported during that year, the excess is permitted to be carried forward to reduce the amount of the CRD distribution included in income in the following year.
  • Clairfies that if an individual dies during the 3-year period, any remaining amounts that have not been recontributed become taxable in the year of death.
  • The Notice provides a sample form that employees can use to certify to their employer that they satisfy the conditions for taking a CRD.

BLS will continue to send important updates as information becomes available. Please be sure to visit our COVID-19 Resource Center. Reach out to your BLS Team Member or email us at info@belfint.com with any questions.

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