IRS Releases Guidance for Retirement Plan Related Relief under the CARES Act
As discussed in our prior blog post, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides special relief provisions for individuals in relation to their retirement plans. The provisions of the CARES Act, however, created uncertainties for both plan administrators and individuals when dealing with the administration of their respective retirement plans. On June 22 and June 23, the IRS issued Notice 2020—50 and Notice 2020—51, respectively, which provide guidance related to treatment of coronavirus-related distributions and the 2020 waiver of required minimum distributions (“RMDs”). On July 17, the IRS issued News Release 2020—162 to remind individuals about the CARES Act relief related to RMDs.
Notice 2020-50: IRS Guidance on Coronavirus-Related Distributions
Notice 2020—50 expands the definition of a qualified individual (i.e. the individuals who are able to take advantage of the retirement plan-related relief provided under the CARES Act) and provides helpful guidance for reporting coronavirus-related distributions from retirement plans. As a reminder, a coronavirus-related distribution is a distribution from an eligible retirement plan to a Qualified Individual (defined below) between January 1, 2020, and December 30, 2020.
Definition of a Qualified Individual
As provided in an IRS News Release, the definition of qualified individual, as expanded under Notice 2020-50, is anyone who
- is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “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
- experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
- 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;
closing or reducing hours of a business that they own or operate due to COVID-19;
- having pay or self-employment income reduced due to COVID-19; or
- having a job offer rescinded or start date for a job delayed due to COVID-19.
This expanded definition will allow more individuals to reap the benefits associated with receiving coronavirus-related distributions.
Reporting a Coronavirus-Related Distributions
For the Qualified Individual to receive favorable tax treatment, the Qualified Individual must report the distribution on his or her for Form 1040 (Individual Income Tax Return) (if applicable) and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments) for 2020. Form 8915-E is expected to be available before the end of 2020. The favorable tax treatment includes the waiver of the 10-percent additional tax, the allowance of the pro-rata inclusion in income, and recontribution benefits. For more information on these benefits, please see our prior blog post.
If the Qualified Individual recontributes his or her coronavirus-related distributions to an eligible retirement plan, the method to report such recontribution depends on whether the Qualified Individual elected to include the coronavirus-related distribution ratably over a 3-year period. If the Qualified Individual reports the entire coronavirus-related distribution in the year of distribution and recontributes such distribution in a later year, the Qualified Individual is required to file a revised Form 8915-E (and amended Form 1040, if applicable).
If the Qualified Individual instead elects the ratable inclusion, then the amount of the recontribution will decrease the amount of the coronavirus-related distribution included in income for that year. The recontribution will be reported on Form 8915-E. Further, if a Qualified Individual recontributes an amount that is greater than the amount included in gross income for the taxable year, the excess recontribution amount may be carried forward, or carried back, to reduce the amount of the coronavirus-related distribution included in income in the future year, or prior year, respectively. If the excess recontribution amount is carried back, a revised Form 8915-E (and amended Form 1040, if applicable) must be filed.
Notice 2020—50 also provides detailed guidance for plan administrators for retirement plan loans.
Notice 2020—51: IRS Guidance on Waiver of Required Minimum Distributions
As discussed in our prior blog post, the CARES Act provides a waiver of RMDs from certain retirement accounts. This new waiver rule may certainly be beneficial for individuals who wish for their retirement plan funds to grow tax-deferred in 2020; however, it also created uncertainty, especially in relation to options for rollovers.
Fortunately, Notice 2020—51 provides that distributions from a retirement plan that would have been an RMD but for the CARES Act are eligible for rollover into an eligible retirement plan, as long as other general rollover requirements are met. Further, an IRA owner or beneficiary who already received an amount that would have been an RMD but for the CARES Act may repay such distribution to the distributing IRA. Such repayment will be treated as a rollover for income tax purposes, which means the owner or beneficiary will not have to pay income tax on the distribution.
Generally, an individual must rollover a payment within 60 days to avoid tax and penalties and is only allowed one rollover within a 12-moth period. In Notice 2020—23, the IRS previously extended the rollover deadline to July 15 for RMDs distributed after January 2020. To provide further relief for individuals who already received distributions in 2020, Notice 2020—51 provides a special rule that the deadline to rollover a payment described above is extended to August 31, 2020. Thus, pursuant to Notice 2020—51, individuals who received distributions in January are now also eligible for rollover relief.
Further, these rollovers will not count towards the one rollover per 12-months limitation and are not restricted by the general rule against rollovers for non-spousal beneficiaries.
Notice 2020—51 also provides information related to the SECURE Act, guidance about plan amendments, and advice regarding other various issues addressed by FAQs.
Attorney Colton F. Castro contributed to this blog post.