Included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act are provisions that would allow qualified persons to access funds in certain retirement accounts without penalty, spread the tax or repay funds over three years, and have repayment treated as a rollover. A distribution must be a coronavirus-related distribution (CRD) to receive this treatment. IRS Notice 2020-50 expands who can qualify for a coronavirus-related distribution, confirms that the recipient certifies that the distribution is a CRD, and clarifies the tax treatment for repayments.
Expanded Definition: Defining Tax Treatment
The CARES Act provides expanded access for distributions up to $100,000 without an early-withdrawal penalty from certain retirement accounts for “qualified individuals.”
Section 2202(a)(4)(A)(ii) of the CARES Act defined a qualified individual as someone who had been diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) or had a spouse or dependent who had been diagnosed or who had suffered certain adverse financial consequences.
Notice 2020-50 added “an individual who experiences adverse financial consequences because of any of the following:
- The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19.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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19.
- 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.”
The Notice makes clear that a qualified individual is permitted to designate a qualifying distribution as a CRD even if the plan does not. A qualified individual can have the income recognized ratably over three years or opt out and have all the income included in the year of distribution.
The Notice lays out tax treatment for when a person receiving a CRD makes a recontribution of all or part of the distribution. It also states that a CRD paid to a beneficiary of an employee or IRA cannot be recontributed. If income was recognized in the year of distribution, repayment after the first year but within three years will necessitate an amended return.
The repayment when income is recognized over three years will first offset income in the year that the payment was made, and any excess can be carried forward or back.
CRD repayments are treated as rollovers, and the Notice noted that a recontribution of a CRD will not be treated as a rollover contribution for purposes of the one-rollover-per-year limitation.