Effective for calendar year 2020 only, the Coronavirus Aid, Relief, and Economic Security (CARES) Act established “coronavirus-related distributions” – distributions of up to $100,000 from most types of tax-qualified retirement plans or IRAs, as a possible additional source of emergency funds for individuals impacted by COVID-19.
In recently issued Notice 2020-50, the IRS provides guidance on numerous technical aspects of these distributions, as well as with respect to the CARES Act’s temporary 2020 expansion of the tax-qualified retirement plan loan provisions. In particular, the IRS has expanded the eligibility requirements for the receipt of a coronavirus-related distribution.
As established by the CARES Act, coronavirus-related distributions…
- Are exempt from the 10% excise tax on taxable IRA and tax-qualified retirement plan distributions received by an individual younger than age 59 1/2;
- May be treated as taxable income ratably over three years; and
- May be treated as a non-taxable rollover to the extent repaid in part or full by making, at any time during the three-year period beginning on the day after the date of the distribution, one or more contributions to an eligible retirement plan that accepts rollover contributions, for a total amount no greater than the amount of the coronavirus-related distribution.
Under the CARES Act, a coronavirus-related distribution was available only to an individual:
- Who or whose spouse or dependent is diagnosed with the virus SARS-CoV-2 or with COVID-19 per a test approved by the Centers for Disease Control and Prevention, or
- Who due to SARS-CoV-2 or COVID-19 experiences adverse financial consequences as a result of being quarantined, furloughed, or laid-off or having work hours reduced, being unable to work due to lack of child care, or closing or reducing hours of a business owned or operated by the individual.
With the release of Notice 2020-50, the following additional adverse financial consequences will also now provide eligibility to receive a coronavirus-related distribution – if, due to COVID-19, an individual’s:
- Pay (or self-employment income) is reduced;
- Job offer is rescinded;
- Job start date is delayed;
- Spouse or other person who shares the individual’s principal residence (household member) is quarantined, furloughed, or laid off, has work hours reduced, is unable to work due to lack of child care, has pay (or self-employment income) reduced, or has a job offer rescinded or job start date delayed; or
- Spouse’s or household member’s business is closed or subject to reduced hours.
What does CohnReznick think?
The IRS’s expansion of the coronavirus-related distribution eligibility requirements make sense, permitting the consideration of a spouse’s or household member’s COVID-19-related adverse financial consequences. As per Notice 2020-50, it is noteworthy that although the individual seeking the retirement plan or IRA distribution must meet one of the above COVID-19-related eligibility requirements in order to qualify for a coronavirus-related distribution, the amount of the distribution is not required to correspond to COVID-19-related adverse financial consequences – in other words, once the individual qualifies, the resulting distribution need not be used to meet a need arising from COVID-19.
Dana Fried, JD, LLM, Managing Director, National Tax Services
Subject matter expertise
JD, LLM, Managing Director - National Tax Services
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.