On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the Act) became law. Section 2202(a) of the Act allowed individuals impacted by the coronavirus to access certain retirement accounts in a tax-advantaged manner. On June 19, 2020, the US Department of the Treasury released Notice 2020-50 (the Notice), which provides guidance to individuals regarding coronavirus-related distributions from qualified plans and individual retirement accounts (IRAs).
Although not addressed in this Alert, the Notice also contains information regarding qualified plan loans and guidance for plan administrators pertaining to coronavirus-related distributions.
This Alert will describe the rules with respect to coronavirus-related distributions pertaining to individuals as amplified by the guidance contained in the Notice.
Definition of Coronavirus-Related Distribution
The Act defines a coronavirus-related distribution as any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020, to a qualified individual.
Eligible Retirement Plan
An eligible retirement plan means a qualified retirement plan, section 403(b) plan, governmental section 457(b) plan, or an IRA.
The Act defines a qualified individual as an individual:
- who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively in the Notice as COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act);
- whose spouse or dependent is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act; or
- who experiences adverse financial consequences as a result of: the individual being quarantined, being
- furloughed or laid off, or having work hours reduced due to COVID-19;
- the individual being unable to work due to lack of childcare due to COVID-19;
- the closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
- other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).
Pursuant to the authority granted in the Act, the Secretary of the Treasury has provided in the Notice other (additional) factors which, having caused an individual to experience financial hardship, would make that individual a qualified individual. These additional factors are:
- the individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
- the individual’s spouse or a member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.
Plan administrators are entitled to rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual, unless the plan administrator has actual knowledge to the contrary. Section 2.E. of the Notice provides a form of acceptable certification.
The Notice warns that the individual may treat a distribution as a coronavirus-related distribution only if the individual actually meets the requirements to be a qualified individual.
The requirement that the plan administrator not have “actual knowledge” that the individual does not meet the conditions to be a qualified individual does not impose a requirement on the plan administrator to investigate. Rather, the requirement that the plan administrator not have “actual knowledge” refers to sufficiently accurate information to make a determination that is already in the possession of the plan administrator.
Distributions made between January 1, 2020, and December 31, 2020, to a qualified individual, up to an aggregate amount of $100,000 for the taxable year from all eligible retirement plans, can be treated as coronavirus-related distributions. The qualified individual receiving the distribution may designate it as a coronavirus-related distribution even though the plan from which the distribution was made did not. Employer-provided plans need not adopt changes that would treat distributions from the plan as coronavirus-related distributions. However, if an employer provided plan adopts rules treating distributions as coronavirus-related distributions, the plan must treat similar distributions consistently. It is important to remember that even if an employer plan does not adopt rules treating certain distributions as coronavirus-related distributions, the plan participant, if a qualified individual, may treat a distribution that meets the requirements of a coronavirus-related distribution as such on the participant’s personal federal income tax return.
The Notice provides a number of examples of what can be treated as a coronavirus-related distribution and also examples of what cannot. Assuming the other conditions are met, the following distributions can qualify as coronavirus-related distributions:
- periodic payments and distributions that would have been required minimum distributions but for the Act;
- any distribution received by a qualified individual as a beneficiary; and
- a reduction or offset of a qualified individual’s account balance in order to repay a plan loan, including a qualified plan loan offset.
Importantly, distributions received by a qualified individual need not correlate to needs resulting from COVID-19. Accordingly, a qualified individual may receive a full $100,000 coronavirus-related distribution, even without suffering such a loss.
Recontribution of Coronavirus-related Distributions
Generally, a coronavirus-related distribution may be recontributed to an eligible retirement plan (including an IRA) within three years beginning from the day after the date it was received by the qualified individual (for taxation of such transactions, see below). Such a recontribution will be treated as having been made in a trustee-to-trustee transfer to that eligible retirement plan.
However, not all coronavirus-related distributions may be recontributed. Only a coronavirus-related distribution that is eligible for tax-free rollover treatment is permitted to be recontributed to an eligible retirement plan. Thus, any coronavirus-related distribution (whether from an employer retirement plan or an IRA) paid to a qualified individual as a beneficiary of an employee or IRA owner (other than the surviving spouse of the employee or IRA owner) cannot be recontributed.
Special rules, however, apply in the case of hardship distributions. Generally, a distribution from an employer retirement plan made on account of hardship is not an eligible rollover distribution. But, if the distribution satisfies the requirements to be a coronavirus-related distribution, then the distribution is not treated as having been made on account of hardship for purposes of the Notice. Therefore, that portion of the distribution that qualifies as a coronavirus-related distribution is permitted to be recontributed to an eligible retirement plan.
Nevertheless, even if a coronavirus-related distribution may not be recontributed to an eligible retirement plan, it would still qualify for the favorable income tax treatment (see below) available to coronavirus-related distributions.
It is anticipated that eligible retirement plans will accept recontributions of coronavirus-related distributions, which are to be treated as rollover contributions. However, eligible retirement plans generally are not required to accept rollover contributions. In the case of an employer-sponsored retirement plan that does not accept any rollover contributions, the plan is not required to accept recontributions of coronavirus-related distributions and is not required to change its terms and procedures to accept them.
Also, notwithstanding that individuals may rollover funds from one IRA to another IRA only once every 12 months, the Notice clarifies that a recontribution of a coronavirus-related distribution will not be treated as a rollover contribution for purposes of the one rollover per 12 month limitation.
Tax Treatment of Coronavirus-related Distributions
Taxation Rules for Distributions
The Act provides special tax treatment for individuals receiving a coronavirus-related distribution. The special treatment includes:
- an exception to the 10% additional tax for early withdrawals before the individual attains age 59½ (including the 25% additional tax for certain distributions from SIMPLE IRAs);
- inclusion of the coronavirus-related distribution in income ratably over three years (although the qualified individual may elect to include the entire coronavirus-related distribution in gross income in the year of receipt.); and
- allows the distribution to be recontributed to an eligible retirement plan within a three-year period, with the recontribution being treated as if it were paid in a direct rollover to an eligible retirement plan.
If the qualified individual does not elect to include the full value of the coronavirus-related distribution in gross income in the year of receipt, thereby including it in gross income ratably over three years, and the qualified individual dies before the full taxable amount of the coronavirus-related income has been included in gross income, then the amount that has not yet been included in gross income shall be included in gross income in the year of the qualified individual’s death.
If the distribution is treated by an employer sponsored plan as a coronavirus-related distribution, the distribution and the plan receive other tax benefits.
The plan is not required to offer the qualified individual a direct rollover to another retirement plan and the plan administrator (or payor) of the coronavirus-related distribution is not required to withhold an amount equal to 20% of the distribution. However, unless the qualified individual elects out, a coronavirus-related distribution is subject to the 10% voluntary withholding requirement.
Taxation Rules for Recontributions
The Notice contains rules with respect to the reporting and taxation of recontributed coronavirus-related distributions. Along with the rules, the Notice provides a number of examples with respect to their application (although space limitations do not allow the examples to be included in this Alert).
- If the qualified individual elects to include the entire amount of all coronavirus-related distributions in gross income for the year in which they are distributed, and recontributes any of such distribution within the three-year recontribution period, the amount recontributed will reduce the amount of gross income for the year of inclusion.
- If the entire coronavirus-related distribution is recontributed to an eligible retirement plan before the qualified individual’s federal income tax return is timely filed (taking into consideration extensions of time to file) for the year of the distribution, then no part of the coronavirus-related distribution would be includible as income for the year of distribution.
If a qualified individual recontributes the distribution to an eligible retirement plan after the timely filing of the individual’s federal income tax return for the year of the distribution (including extensions), the individual will need to file an amended federal income tax return for the year of the distribution (including an amended Form 8915-E reporting the recontribution).
If a qualified individual includes a coronavirus-related distribution ratably over a three-year period, and if that individual recontributes any portion of the coronavirus-related distribution within the three-year recontribution period:
- If the recontribution occurs before the timely filing of the individual’s federal income tax return (including extensions) for a tax year during the three-year period, the amount of the recontribution will reduce the ratable portion of the coronavirus-related distribution that is includible in gross income for that tax year.
- If the amount recontributed in a particular tax year exceeds the ratable portion of the coronavirus related distribution that was included in gross income for that tax year, so that there is insufficient coronavirus-related income included in gross income for that tax year to absorb the amount recontributed in that tax year (as described above), the qualified individual has two reporting (and taxation) options:
- the qualified individual may carry forward the amount by which the recontribution exceeds the ratable portion of the coronavirus-related distribution that was included in gross income for the year of the recontribution and use such excess to reduce the amount of the coronavirus-related distribution that is includible in gross income in the next tax year of the three-year period, or
- the qualified individual may carry back the amount by which the recontribution exceeds the ratable portion of the coronavirus-related distribution that was included in gross income for the year of the recontribution and use such excess to reduce the amount of the coronavirus-related distribution that is includible in gross income for a prior taxable year or years. The individual will need to file an amended federal income tax return for the prior taxable year or years (including Form 8915-E).
Consult Your Personal Tax Adviser
The Notice provides welcome guidance with respect to the taxation and filing requirements for coronavirus-related distributions. The Notice also provides helpful examples for reporting coronavirus-related distributions to the IRS. Nevertheless, each person’s tax situation is different. Consult your personal tax advisor for information regarding how the Notice will impact your individual circumstances.
For more information, please contact your PNC advisor.