By Jeffrey G. Moore, Attorney in the Estate Planning & Probate Practice Group
These are curious times. The COVID-19 has adversely affected almost everyone in one way or another.
Those who have been financially affected and who own an Individual Retirement Account (“IRA”), the Coronavirus Aid, Relief, and Economic Security Act or “CARES Act,” which was enacted on March 27, 2020, offers some potential relief. Special distribution options for IRAs were included as part of the $2-trillion CARES Act package. The IRS has recently published answers to many of the most frequently asked questions regarding these special provisions on its web page found at https://tinyurl.com/IRA-FAQs. Below is a partial summary of some of the key questions that may be applicable to you:
Q: What are the special rules for IRA accounts under the CARES Act?
A: The CARES Act provides for favorable distribution options and tax treatment for up to $100,000 of “coronavirus-related distributions” from IRAs to “qualified individuals.”
Q: What is a coronavirus-related distribution?
A: A distribution that is made from an IRA to a “qualified individual” from January 1, 2020, to December 30, 2020, limited to an aggregate amount of $100,000 from all IRA or eligible retirement accounts.
Q: Who is a “qualified individual?”
A: You are a qualified individual if –
– You, your spouse, or a dependent is diagnosed with SARS or COVID-19 (the “virus”) by a CDC-approved test;
– You experience adverse financial consequences because of quarantine, furlough, job loss, or reduced work hours due to the virus;
– You experience adverse financial consequences because of your inability to work due to lack of child care as a result of the virus; or
– You experience adverse financial consequences as a result of closing or reducing the working hours of a business that you own or operate due to the virus.
The IRS is continuing to review comments from the public on this topic and has indicated that it may expand the factors that result in “adverse financial consequences.”
Q: Are you required to pay the 10% “early distribution” penalty on a coronavirus-related distribution?
Q: Is the distribution still taxable? If so, when are you required to pay the tax on a coronavirus-related distribution?
Yes. However, the distributions are includible in your taxable income ratably over a three-year period, starting with the year in which you took the qualified coronavirus-related distribution. The example the IRS gives is as follows: “[I]f you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022.” You could also opt to include the entire distribution in your income for the tax year of the qualified distribution.
Q: Can I repay a coronavirus-related distribution?
A: Generally speaking, yes, you can repay all or part of a coronavirus-related distribution so long as the repayment occurs within three years from the date of the distribution. To the extent the distribution is repaid, the distribution would not be subject to federal income tax.
The IRS gives the following example: “If… you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount… in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022.”
Q: How do I report a coronavirus-related distribution?
A: A coronavirus-related distribution should be reported on your 2020 personal federal income tax return. Presuming that you are a “qualified individual,” any eligible distribution can be designated on the return as a coronavirus-related distributed so long as the total amount of eligible distributions does not exceed $100,000.
As stated above, unless you elect to have the entire distribution treated as taxable in 2020, the qualified distribution must be ratably included on your returns over the 3-year period – 2020, 2021, and 2022. The IRS states, “Whether or not you are required to file a federal income tax return, you would use Form 8915-E (which is expected to be available before the end of 2020) to report any repayment of a coronavirus-related distribution and to determine the amount of any coronavirus-related distribution includible in income for a year.”
Note that these rules are potentially, but less commonly, applicable to certain employer-sponsored retirement plans (e.g., 401(k) or 403(b) retirement plan) if the plan includes such provisions. Less common, in part, because plan sponsors would be required to amend the plans to accommodate for these short-lived COVID-19 rules.
Although it has been expressed many times over by just as many, we nevertheless add our sincere expression of empathy and hope to all those adversely affected by this pandemic. We hope to see you soon.
Jeffrey Moore is a partner in the Estate Planning & Probate practice group. The information in this article is not intended to provide legal advice. For professional consultation, please contact Jeff at firstname.lastname@example.org at Saalfeld Griggs PC. 503.399.1070. © 2020 Saalfeld Griggs PC