>>CARES Act Required Minimum Distribution Waiver

CARES Act

The CARES Act includes a provision allowing an eligible individual to take a Coronavirus-related distribution(s) from certain retirement plans (including IRAs) through December 30, 2020. In addition to favorable tax treatment on the distribution, the law allows amounts to be repaid to certain retirement plans within three years after having taken the distribution(s). This article has been updated as a result of the IRS’s release of Notice 2020-50 on June 19, 2020.

Overview

Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (i.e., the CARES Act) which was enacted on March 27, 2020, includes a provision allowing for individuals to take Coronavirus-related distributions from certain retirement plans and the potential to repay such distributions. In general, the CARES Act allows special tax treatment on up to $100,000 in aggregate distribution amounts from 401(k) plans, 403(b) plans, and individual retirement accounts (IRAs), considering that such distributions are taken during 2020 through December 30. This article is written from the perspective of the CARES Act’s impact on IRAs. On June 19, 2020 the Internal Revenue Service (IRS) released additional guidance as it relates to the CARES Act and Coronavirus-related distributions. This additional guidance, in the form of Notice 2020-50, has been incorporated below.

Coronavirus-related distribution eligibility

An individual that is eligible to take a Coronavirus-related distribution includes:
An account owner who has been, or whose spouse or dependents have been, diagnosed with either SARS-CoV-2 or COVID-19 virus by a test approved by the Centers for Disease Control and Prevention, including a test authorized under the Federal Food, Drug, and Cosmetic Act

An account owner that has experienced adverse financial consequences as a result of the above-mentioned viruses including someone who has:
Been quarantined, furloughed, laid off, or had work hours reduced
Been unable to work due to lack of childcare, or
Been affected by the close of a business or by a reduction of business hours that an individual owns or operates

Additionally, IRS Notice 2020-50 expands the list of individuals eligible to take a coronavirus-related distribution to account owners who experience adverse financial consequences as a result of:

Having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19
Their spouse or a member of the their household (i.e., one who shares the principal residence) being quarantined, 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
The closing or reduction of hours of a business owned or operated by the account owner’s spouse or a member of the individual’s household due to COVID-19

Note the law and IRS Notice 2020-50 refer to eligible individuals as ‘qualified individuals’.

Taxation of coronavirus-related distributions

The CARES Act limits the amount available for special tax treatment to $100,000 in aggregate distributions from any combination of employer retirement plans and IRAs. The coronavirus-related distribution provision under the CARES Act allows an eligible individual (i.e., IRA owner or beneficiary of a deceased account owner) to include the taxable portion of a coronavirus-related distribution in his/her income ratably over a three-year period, starting with 2020. However, an eligible individual has the option of including the entire taxable portion of a distribution amount as income on his/her 2020 federal income tax return. Additionally, an eligible individual avoids the 10 percent additional tax (i.e., 10 percent penalty tax) if he/she has not yet attained age 59½.

Example 1: Jill, age 52, took a coronavirus-related distribution in the amount of $15,000 from her IRA on May 1, 2020. Rather than including the entire distribution amount on her 2020 federal income tax return she chooses to include $5,000 on her tax return for each of the next three years (i.e., tax years 2020, 2021, and 2022). Jill will report these ratable distribution amounts each year on her federal income tax return and IRS Form 8915-E which is expected to be available before the end of tax year 2020.

Example 2: Dave, age 56, who was not (nor were his spouse or dependents) affected by the coronavirus, took a distribution of $10,000 from his IRA on July 3, 2020. As Dave does not meet the eligibility criteria for his IRA distribution to be considered a coronavirus-related distribution the entire amount would be includable on his federal income tax return for 2020 unless he was eligible and completed a rollover within 60 days after the date of receipt.

Repayment/recontribution of coronavirus-related distributions

An IRA owner may repay to an eligible retirement plan all or part of the amounts taken from a retirement plan in 2020 under the coronavirus-related distribution provision, provided it is done within three-years after the date that the distribution was received. As a result, these repayments have the tax effect of a rollover (i.e., the amount repaid avoids federal income tax). Additionally, for repayment purposes, the ‘rollover’ of a coronavirus-related distribution will not be included in the one-per year rollover rule, and because the deadline to complete a repayment is three years after the date the distribution was received, the 60-day rollover rule will not apply.

Example 1: Jill, from an earlier example, took a coronavirus-related distribution of $15,000 from her IRA on May 1, 2020 and chose to include the distribution amount in income over a three-year period. Jill also chose to repay the full amount to her IRA in December of 2022. Jill will file amended federal tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that was included in income for those years. Jill will not be required to include any amount in her income for 2022.

Example 2: Dave, from an earlier example, took a $10,000 distribution from his IRA in 2020. As Dave does not meet the definition of an individual eligible to take a coronavirus-related distribution he is subject to the one-per year and 60-day rollover rules.
Reporting the repayment/recontribution (treated as a rollover) of a coronavirus-related distribution has not yet been clarified by the IRS. Unity Bank will update this article when clear reporting requirements are released.

Conclusion

An IRA owner will need to substantiate to the IRS that he/she is eligible for a coronavirus-related distribution and not the IRA custodian/trustee. The distinction is important because the ratable taxation rules, waiver of the 10 percent penalty tax, and the relaxed repayment rules are quite different than for an IRA owner not qualified to take a coronavirus-related IRA distribution. While IRS Notice 2020-50 expanded the availability for IRA owners and beneficiaries to utilize these rules and clarified tax treatment for individuals, more guidance is necessary for IRA custodian/trustee reporting of repayments/recontributions. Look for future articles posted to Insights for any updated information regarding this specific subject matter or matters in general on the SECURE Act or CARES Act.

2020 Required Minimum Distribution Waiver

The term IRA will be used below to mean Traditional IRA, Roth IRA, and SIMPLE IRA, unless otherwise specified. If this is an inherited IRA, the IRA Owner is the beneficiary who has inherited this IRA.

The Coronavirus AID, Relief and Economic Security (CARES) Act, signed into law on March 27, 2020, states that individuals, including beneficiaries, are not required to take required minimum distributions (RMDs) from their Traditional and SIMPLE IRAs, or inherited IRAs in 2020. In addition, a beneficiary of inherited IRA assets, who has elected to take distribution of the IRA by December 31 of the fifth year following the year of the original IRA owner's death, is not required to count 2020 in the calculation of the fiver year period, gaining one year to deplete the inherited IRA.

NOTE: If you have already received a payment in 2020, you may wish to consult with a competent tax advisor to determine your options. A summary of potential options for returning your RMD is provided below.

If you are an IRA owner who has already withdrawn an RMD in 2020 (including a 2019 RMD that was due by April 1, 2020), or you are a spouse or nonspouse beneficiary of a deceased IRA owner and have already withdrawn a 2020 RMD, you may be able to return all or any portion of the RMD amount to an IRA, as indicated below.

An IRA owner or spouse beneficiary who has not performed an IRA -to-IRA rollover in the 12 months immediately preceding the date the RMD was withdrawn in 2020, may roll over all or any portion of the RMD to an IRA by August 20, 2020. This rollover may be completed even if the normal 60-day time limit for rollovers has passed.
If you are an IRA owner or spouse beneficiary who has already performed an IRA-to-IRA rollover in the 12 months immediately preceding the date the RMD was taken in 2020, or you are a nonspouse beneficiary who has withdrawn a 2020 RMD, you may repay all or any portion of the RMD withdrawn in 2020 to the distributing IRA by August 31, 2020.