COVID-19 Relief: Distributions from an Eligible Retirement Account
The “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” was signed into law by President Trump on March 27, 2020. Among the various provisions that provide US individuals with financial relief, one of the most overlooked provisions deals with a “coronavirus-related distribution” from an eligible retirement account (which is described in §2202 of the Act). Individuals will be able to withdraw up to $100,000 from an eligible retirement count with certain penalties waived and extended repayment options made available.
For purposes of the Act, a “coronavirus-related distribution” means any distribution from an eligible retirement plan made–
- on or after [March 27, 2020] and before December 31, 2020,
- to an individual–
- who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
- whose spouse or dependent (as defined in section 152 of the Internal Revenue Code) is diagnosed with such virus or disease by such a test, or
- who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).
Withdraw up to $100,000 from an Eligible Retirement Account Without a Penalty
Individuals, subject to certain exceptions, are generally assessed a 10% penalty on any distributions from a retirement account prior to obtaining the age of 59 ½ (see IRC §72(t)). However, under the Act, a coronavirus-related distribution will be exempt from the 10% penalty.
Please note that the penalty is normally in addition to any income tax that is due on the distribution. Distributions from a retirement account are included as income and subject to a taxpayer’s ordinary tax rates (as provided by the applicable tax brackets in a given tax year). This exception only applies to the penalty and not to the income tax due on the distribution.
Coronavirus-related Distribution Income Spread Over 3-Year Period
A taxpayer ordinarily recognizes the entire retirement account distribution as income during the tax year in which the distribution was made. However, the Act provides that the distribution can be recognized ratably over the 3-year period beginning with 2020.
In other words, if a taxpayer takes a $100,000 corona-related distribution during 2020, the taxpayer would recognize $33,333 (adjusted for rounding) in 2020, 2021 and 2022, respectively. Depending on your future income prospects during the next 3 years, ratably recognizing this income over the next 3-year period will generally allow you to save on the amount of tax ultimately due.
Note that a taxpayer can opt out of this deferment option and either: (a) recognize all of the income during 2020, or (b) recognize $33,333 during 2020 and $66,667 (adjusted for rounding) in 2021. One should take into account future income prospects in order to determine the appropriate recognition of this income.
Coronavirus-related Distributions can be Repaid During the 3-Year Period
Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan. Doing so will essentially treat the coronavirus-related distribution as an eligible direct trustee to trustee transfer within 60 days of distribution for purposes of both an eligible retirement plan. In other words, the distribution will not be treated as taxable distribution, and no tax will be owed on the distribution.
The IRS will most likely issue additional guidance with respect to the treatment of the repayment over the coming months or year. For now, we expect that amended tax returns will be needed for any year in which a coronavirus-related distribution is included as part of income and that the IRS will issue any applicable refunds as a result.
Greenberg Bitton LLP: Committed to those affected by COVID-19
If your small business has been financially affected by COVID-19, contact us today to help you determine available relief options and for assistance preparing the applicable applications or filings.
Greenberg Bitton LLP can help small businesses:
- Apply for an SBA loan
- Determine COVID-19 relief that is available to you
- Navigate through the complex laws and compliance requirements
If your small business has been affected by COVID-19, contact Greenberg Bitton LLP online or call (877) 829-5294 to get help from one of our tax law attorneys today!