Author Archives: Diana Berlin

IRS Releases Guidance for Retirement Plan Related Relief under the CARES Act

As discussed in our prior blog post, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides special relief provisions for individuals in relation to their retirement plans. The provisions of the CARES Act, however, created uncertainties for both plan administrators and individuals when dealing with the administration of their respective retirement plans. On June 22 and June 23, the IRS issued Notice 2020-50 and Notice 2020-51, respectively, which provide guidance related to treatment of coronavirus-related distributions and the 2020 waiver of required minimum distributions (“RMDs”). On July 17, the IRS issued News Release 2020-162 to remind individuals about the CARES Act relief related to RMDs.

Notice 2020-50: IRS Guidance on Coronavirus-Related Distributions

Notice 2020-50 expands the definition of a qualified individual (i.e. the individuals who are able to take advantage of the retirement plan related relief provided under the CARES Act) and provides helpful guidance for reporting coronavirus-related distributions from retirement plans. As a reminder, a coronavirus-related distribution is a distribution from an eligible retirement plan to a Qualified Individual (defined below) between January 1, 2020 and December 30, 2020.

Definition of a Qualified Individual

As provided in an IRS News Release, the definition of qualified individual, as expanded under Notice 2020-50, is anyone who

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
    • being quarantined, being 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;
    • closing or reducing hours of a business that they own or operate due to COVID-19;
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

This expanded definition will allow more individuals to reap the benefits associated with receiving coronavirus-related distributions.

Reporting a Coronavirus-Related Distributions

For the Qualified Individual to receive favorable tax treatment, the Qualified Individual must report the distribution on his or her for Form 1040 (Individual Income Tax Return) (if applicable) and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments) for 2020. Form 8915-E is expected to be available before the end of 2020. The favorable tax treatment includes the waiver of the 10-percent additional tax, the allowance of the pro-rata inclusion in income, and recontribution benefits. For more information on these benefits, please see our prior blog post.

If the Qualified Individual recontributes his or her coronavirus-related distributions to an eligible retirement plan, the method to report such recontribution depends on whether the Qualified Individual elected to include the coronavirus-related distribution ratably over a 3-year period. If the Qualified Individual reports the entire coronavirus-related distribution in the year of distribution and recontributes such distribution in a later year, the Qualified Individual is required to file a revised Form 8915-E (and amended Form 1040, if applicable).

If the Qualified Individual instead elects the ratable inclusion, then the amount of the recontribution will decrease the amount of the coronavirus-related distribution included in income for that year. The recontribution will be reported on Form 8915-E. Further, if a Qualified Individual recontributes an amount that is greater than the amount included in gross income for the taxable year, the excess recontribution amount may be carried forward, or carried back, to reduce the amount of the coronavirus-related distribution included in income in the future year, or prior year, respectively.  If the excess recontribution amount is carried back, a revised Form 8915-E (and amended Form 1040, if applicable) must be filed.

Notice 2020-50 also provides detailed guidance for plan administrators for retirement plan loans.

Notice 2020-51: IRS Guidance on Waiver of Required Minimum Distributions

As discussed in our prior blog post, the CARES Act provides a waiver of RMDs from certain retirement accounts. This new waiver rule may certainly be beneficial for individuals who wish for their retirement plan funds to grow tax-deferred in 2020; however, it also created uncertainty, especially in relation to options for rollovers.

Fortunately, Notice 2020-51 provides that distributions from a retirement plan that would have been an RMD but for the CARES Act are eligible for rollover into an eligible retirement plan, as long as other general rollover requirements are met. Further, an IRA owner or beneficiary who already received an amount that would have been an RMD but for the CARES Act may repay such distribution to the distributing IRA. Such repayment will be treated as a rollover for income tax purposes, which means the owner or beneficiary will not have to pay income tax on the distribution.

Generally, an individual must rollover a payment within 60 days to avoid tax and penalties and is only allowed one rollover within a 12-moth period. In Notice 2020-23, the IRS previously extended the rollover deadline to July 15 for RMDs distributed after January 2020. To provide further relief for individuals who already received distributions in 2020, Notice 2020-51 provides a special rule that the deadline to rollover a payment described above is extended to August 31, 2020. Thus, pursuant to Notice 2020-51, individuals who received distributions in January are now also eligible for rollover relief.

Further, these rollovers will not count towards the one rollover per 12-months limitation and are not restricted by the general rule against rollovers for non-spousal beneficiaries.

Notice 2020-51 also provides information related to the SECURE Act, guidance about plan amendments, and advice regarding other various issues addressed by FAQs.

Attorney Colton F. Castro contributed to this blog post.

Why Individuals Should Care About the CARES Act: Retirement Plans and Charitable Contributions

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various relief provisions for individuals, including provisions that benefit individuals in relation to their retirement plans and that provide an increase in allowable charitable deductions. Continue reading

Why Individuals Should Care About the CARES Act: Retirement Plans and Charitable Contributions

An update to this post was published May 11, 2020.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various relief provisions for individuals, including provisions that benefit individuals in relation to their retirement plans and that provide an increase in allowable charitable deductions.

Income Taxation of Retirement Plans

10 Percent Additional Tax Waived for Coronavirus-Related Distributions
Generally, the IRS imposes ordinary income tax on retirement plan distributions. The IRS also imposes a 10 percent additional tax on retirement plan distributions that are included in the distributee’s gross income unless the distributee is over the age of 59½ or another exception is met.

The CARES Act waives this 10 percent additional tax for any “coronavirus-related distribution” up to $100,000. It is not necessary that the relevant plan allowed hardship distributions prior to the CARES Act. A coronavirus-related distribution is defined as any distribution from an eligible retirement plan, which includes IRAs, IRA annuities, qualified trusts, certain other retirement annuities, and specific deferred compensation plans, made during 2020 to an individual that meets one of the following criteria (“Qualified Individual”):

  • He or she is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC;
  • His or her spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC; or
  • He or she experiences adverse financial consequences as a result of being quarantined, being furloughed, 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.
    The administrator of the retirement plan may rely on the employee’s certification that the employee meets one of the above conditions to determine whether the distribution qualifies as a coronavirus-related distribution.

Three-Year Rules Related to the Income Taxation of Coronavirus-Related Distributions
Although the 10 percent additional tax is waived when the foregoing requirements are met, the IRS will generally still impose income tax on distributions from an eligible retirement plan.
To provide further relief, unless the Qualified Individual elects out of this treatment, the amount of the coronavirus-related distribution required to be included in gross income will be includable ratably over a three-year period beginning with the year of the distribution. In other words, the tax liability payments may be spread out over this three-year time period.

Further, a Qualified Individual may repay an amount up to the amount of the coronavirus-related distribution to the eligible retirement plan within the three-year period beginning with day after the date of the distribution. If the Qualified Individual repays the corona-related distribution, then the Qualified Individual will be treated as transferring the repayment tax-free to the eligible retirement plan and the repayment will not affect the cap on retirement account contributions.

Loans from Qualified Employer Plans for Coronavirus-Related Relief
The CARES Act provides more flexibility for Qualified Individuals to take out loans from qualified employer plans, which includes a 401(a) plan, certain annuity plans, and certain 403(b) plans. Prior to the CARES Act, an individual could take out a loan without it being treated as a distribution from a qualified employer plan in the amount that was the lesser of $50,000 or one-half of the value of the account balance. For the 180-day period beginning on March 27, 2020, a Qualified Individual may now take out a loan up to the lesser of $100,000 or the full value of the account balance.

Additionally, if a Qualified Individual has an outstanding loan from a qualified employer plan that is due between March 27, 2020 and December 31, 2020, the due date will be delayed for one year; however, interest will accrue during such delay. The one-year delay will not count toward the five-year requirement that a loan from a qualified employer plan be repayable within five years.

Required Minimum Distribution Rules for Retirement Plans

Temporary Waiver of Required Minimum Distribution Rules
For 2020, the required minimum distribution (“RMD”) requirements for certain defined contribution plans and individual retirement plans do not apply. This includes any RMD, including RMDs from 2019, that are required to be made in 2020 as long as it was not made before 2020. This includes RMDs that were required to begin in 2020 due to an owner turning 70½ in 2019.

Similar to the relief provided in 2009 as a result of the economic recession, amounts distributed in 2020 that would otherwise have been an RMD are eligible for rollover, subject to limitations.
There are also various provisions related to plan amendments.

Charitable Deductions
For individuals who do not itemize deductions, the CARES Act provides a new above-the-line deduction for qualified charitable contributions up to $300 annually. To qualify, the contribution must be made in cash to a 170(b)(1)(A) organization, which does not include a 509(a)(3) supporting organization or a donor advised fund.

The CARES Act also provides benefits for individuals and corporations who itemize deductions when such taxpayers contribute cash to a 170(b)(1)(A) charitable organization (not including a 509(a)(3) supporting organization or a donor advised fund) and elect for such benefits to apply (“Qualified Contribution”). In the case of a partnership or S-corporation, the election for such benefits to apply must be made separately by each partner or shareholder.

For individuals who itemize deductions, the CARES Act removes the cap (which was 60 percent of adjusted gross income) for 2020 on the deduction for a Qualified Contribution. Thus, an individual who itemizes deductions may deduct a Qualified Contribution to the extent such contribution does not exceed the individual’s adjusted gross income. An individual may carry over and deduct the excess Qualified Contribution over the following five-year period.
For corporations, the CARES Act changes the limitation from 10 percent to 25 percent of the corporation’s taxable income on the deduction for a Qualified Contribution for 2020. The corporation will also be able to carry over and deduct the excess Qualified Contribution in the following five years, subject to limitations.

Finally, the CARES Act changes the limitation from 15 percent to 25 percent of net income on the deduction for a charitable contribution of food inventory from a trade or business during 2020.

Diana L. Berlin
dberlin@williamsparker.com
(941) 329-6616

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