The IRS expanded its guidelines on June 20th with Notice 2020-50 that allows additional qualified individuals to take a coronavirus-related distribution (CRD) while avoiding the usual restrictions on early IRA distributions. Under the CARES Act, qualified individuals may receive favorable treatment for IRA distributions up to $100,000 from eligible retirement plans (i.e. 401k/403b and 457s) until December 31, 2020. Additionally, the 10% tax on early distributions is waived for any CRD if the distribution is taken before the account holder reaches 59 ½.
The Notice expands eligibility of “qualified individual” under the CARES Act
The original Act indicates a qualified individual is someone diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19 by a CDC approved test or a person who experienced adverse financial consequences resulting from being quarantined, furloughed or laid off or having hours reduced, unable to work due to lack of child care or closing or reduced hours for a business owned by the individual, any as a result of COVID-19.
The definition of “qualified” was expanded to include the individual and/or spouse, or a member of the individual’s household who had a job offer rescinded or start date delayed due to COVID-19. Additionally, a qualified individual includes someone whose income is affected by COVID-19 because a spouse or other household member (sharing the principal residence) experienced an income reduction due to COVID-19.
Also qualifying are household members unable to work due to lack of childcare because of COVID-19, as well as business owners/operators who lose income due to closing or reducing hours of business due to COVID-19.
Notice 2020-50 clarifies that while it is optional for employers and plans to designate distributions as COVID-related, qualified individuals whose distributions meet the above requirements will still receive this favorable federal tax treatment, even if a distribution is not classified as a CRD by the employer.
The CARES Act also provides somewhat of a tax holiday to a Qualified Individual
While a distribution from a qualified retirement plan is generally included in taxable income in the year of distribution, the CARES Act permits a qualified individual to include a CRD in taxable income ratably over a three-year period. Notice 2020-50 clarifies this is an election on the part of the qualified individual who may choose instead to include the entire CRD in taxable income in the year of receipt; however, this election may not be changed. All CRDs must be treated in the same manner as reflected on the qualified individual’s 2020 tax return.
Additionally, the CARES Act permits a qualified individual to re-contribute a CRD to a qualified retirement plan. Unlike the tax treatment of a CRD, whether a CRD will be re-contributed to a qualified retirement plan or the manner in which it will be re-contributed, does not have to be determined before the filing of the qualified individual’s 2020 tax return. Notice 2020-50 says that the decision can be made at any time during the three-year period and provides for the filing of amended returns to reflect the re-contribution of all or a portion of the CRD.