by Denise Appleby
This article is reprinted with permission from Leimberg Information Services, Inc. (LISI).
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in response to the COVID-19 outbreak and its impact on the economy, public health, state and local governments, individuals, and businesses. Section 2202 of the CARES Act permits qualified individuals to take coronavirus-related distributions from eligible retirement plans that are penalty-free and qualify for other special tax benefits. But there were, and still are, many unanswered questions about coronavirus-related distributions. The Internal Revenue Service, in its quest to answer these questions, has issued guidance, including the recently issued Notice 2020-50, that provides some unexpected answers and opportunities. The below article covers five of these.”
What’s the Big Deal About Coronavirus-Related Distributions?
Coronavirus-related distributions are a hot commodity right now, as they allow qualified individuals to access funds from their tax-deferred retirement savings accounts without the usual immediate tax consequences and penalties. These are:
Exemption from the 10% early distribution penalty
A 10% early distribution penalty applies to distributions taken before the account owner reaches age 59 ½, unless the amount qualifies for an exception. For a SIMPLE IRA, the penalty is increased to 25% if the distribution is made from a SIMPLE IRA that has not been funded with a SIMPLE IRA contribution for at least two years. Coronavirus-related distributions have been added to the list of exceptions.
Three years to include in income
A distribution from a retirement account is generally included in income for the year in which the amount is distributed. A coronavirus-related distribution is an exception to this general rule, allowing the account owner to include the amount in income ratably over three years, starting with 2020. If the account owner prefers, an election can be made to include the entire amount in income for 2020.
Three years to roll over
An account owner who wants to exclude a distribution from income by returning it to an eligible retirement account- where it would continue to benefit from tax-deferred growth, may do so by rolling over the amount within 60 days of receipt. This 60-day period is waived or extended under limited circumstances, one of which is a distribution that qualifies as a coronavirus-related distribution. Under this waiver, a coronavirus-related distribution that is eligible for rollover, can be rolled over within 3 years of receipt.
These tax-friendly features make a coronavirus-related distribution- which is capped at $100,000 per person- an attractive solution for those who are facing financial difficulties. But, one requirement for eligibility is that they are available only to qualified individuals. The following are some of the surprising revelations provided by the IRS in Notice 2020-50, including the expanded definition of a ‘qualified individual’ for coronavirus-related distribution purposes.
1. You Can Get Qualified Through Your Spouse; Or The Butcher, The Baker, Or The Candlestick Maker- If They Share Your Principal Residence
A coronavirus-related distribution must meet three key requirements. It must be made:
· At any time from January 1, 2020 through to December 31, 2020,
· From an eligible retirement plan, and
· By a qualified individual.
For this purpose, an eligible retirement plan means:
· An individual retirement account (IRA),
· An individual retirement annuity (IRA) other than an endowment contract,
· A qualified plan, such as a pension, 401(k) or profit-sharing plan,
· A 403(a) annuity plan,
· A governmental and eligible deferred compensation 457(b) plan, and
· A 403(b) account or annuity.
The definition of a qualified individual has been expanded under Notice 2020-50 to include your spouse or a member of your household, who faces adverse financial consequences as a result of COVID-19. The following is the definition under the CARES Act and the addition provided under Notice 2020-50:
|Under The CARES Act||Added By Notice 2020-50|
• who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively in this 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 (as defined in section 152 of the Code) 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:
o the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
o the individual being unable to work due to lack of childcare due to COVID-19; or
o closing or reducing hours of a business owned or operated by the individual due to COVID-19.
An individual who experiences adverse financial consequences as a result of:
• 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 (as defined below) 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.
This expanded definition now confirms that if you are not adversely affected by COVID-19- financially speaking- you would still be eligible for a coronavirus-related distribution if your spouse or a member of your household experiences adverse financial consequences as a result of COVID-19.
2. You Can Take It Even If You Don’t Need It
You Can Get It If You Really Want” is appropriate here. Because, if you are a qualified individual, you may take a coronavirus-related distribution if you want to, even if you do not have a financial need arising from COVID-19.
As to whether you should, is a different question of course, and one that should be seriously discussed with a financial and/or tax advisor.
3. A Distribution From A Beneficiary Account Can Be A Coronavirus-Related Distribution
One of the outstanding questions about who is a qualified individual, for purposes of taking a coronavirus-related distribution, is whether the holder of a beneficiary account under an employer-sponsored retirement plan or IRA could qualify. IRS Notice 2020-50 confirms any distribution received by a qualified individual can be treated as a coronavirus-related distribution, even if the distribution is made from a beneficiary IRA or beneficiary account under an employer-sponsored retirement plan. As a result, the income from such amounts is eligible to be spread ratably over 3-years.
4. The Only Beneficiary Permitted To Roll Over A Coronavirus-Related Distribution Is A Spouse Beneficiary
The tax code and all official guidance make it clear that only a spouse beneficiary may roll over a distribution taken from an inherited retirement account. Notice 2020-50 also confirms that even if the distribution is a coronavirus-related distribution, it is not eligible for tax-free rollover treatment if it is made to a beneficiary, unless the beneficiary is the surviving spouse of the deceased account owner.
5. A Distribution That Is eligible For Rollover Cannot Qualify As A Coronavirus-Related Distribution
Amounts distributed from eligible retirement plans can be restored to the same or another eligible retirement plan through rollovers- where permitted, only if the amount is eligible to be rolled over. If an amount is not ordinarily eligible to be rolled over, such an amount is not eligible for the benefits available to coronavirus-related distributions. These amounts include certain substantially equal periodic payments, and a distribution that is made on account of hardship of an employee.
An exception applies to a hardship distribution, if it meets the requirements to be considered a coronavirus-related distribution. Under that exception, the usual hardship withdrawal rules are disregarded, and the coronavirus-related distribution rules would apply- making the amount eligible for rollover.
Notice 2020-50 confirmed that because there is no required minimum distribution (RMD) for 2020, any distribution that would have otherwise been an RMD except for the CARES Act, is an eligible rollover distribution- and eligible for the coronavirus-related distribution benefits, if taken by a qualified individual. This RMD exception does not apply to RMDs from defined benefit plans- as those are not waived, and distributions taken by beneficiaries from retirement accounts- unless the beneficiary is the surviving spouse of the decedent.
Because You Can, Does Not Mean That You Should
A large number of Americans face adverse financial consequences as a result of the COVID-19 pandemic- including loss of job-related income. And for many, a coronavirus-related distribution is the only solution to staying above choppy financial waters. But, if you are a qualified individual who does not need to take a coronavirus-related distribution, it might be in your best financial interest to leave the amount in your retirement savings account.
There are factors that must be considered, most of which are not broached in this newsletter. Regardless of your choice, be sure to consult with your financial and tax advisor before taking action
About the Author - Denise Appleby
Denise Appleby is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA tools and resources for financial and tax professionals. She has over 20 years of experience in the retirement plans field and has co-authored several books and written over 500 articles on IRA rules and regulations. Denise held several senior retirement-plans related positions with Pershing LLC, which includes Vice President of Retirement Plans Products and Services, Retirement Plans Manager, Trainer, Training Manager, Compliance Consultant, IRA/Retirement Plans Technical Help Desk Manager and Writer. Denise obtained her Master of Jurisprudence from John Marshall Law School, and is her undergraduate degree from Rutgers University, holds the following professional certifications: Accredited Pension Administrator (APA), National Institute of Pension Administrators, Chicago IL, Certified IRA Services Professional (CISP), Institute of Certified Bankers, Washington DC, Chartered Retirement Plans Specialist (CRPS), College of Financial Planning; Denver CO, Certified Retirement Counselor (CRC), International Foundation for Retirement Education (InFRE), Certified Retirement Services Professional (CRSP), Institute of Certified Bankers, Washington DC. Denise's wealth of knowledge in retirement plans led to her making appearances on CNBC's Business News, Fox Business News and numerous radio shows. In addition, she has been quoted in the Wall Street Journal, Investor's Business Daily, CBS MarketWatch's Retirement Weekly and other financial publications, where she gave insights on retirement planning.
This article was originally published in LISI Employee Benefits & Retirement Planning Newsletter #743 (July 8, 2020) at http://www.leimbergservices.com.