People whose adverse financial consequences count for getting a coronavirus-related distribution now include spouses and other household members. The IRS has also clarified with lots of examples the thorny intersection between recontributions, taxes, and amended returns.
The new IRS guidance presents the rules set out in Act Sec. 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). The guidance provides safe harbors for employers, including employee certifications and plan loan payment relief. The focus here, however, is on individuals and their taxes.
Coronavirus-Related Distributions and Loans
The CARES Act provides that qualified individuals may treat as coronavirus-related distributions up to $100,000 in distributions made from their eligible retirement plans (including IRAs) between January 1 and December 30, 2020. To qualify, the distributions must be made 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 is diagnosed with such virus or disease by such a test, or
- who experiences adverse financial consequences as a result the coronavirus.
The CARES Act lists several “factors” that would count as an individual suffering adverse financial consequences due to the virus. These factors include:
- being quarantined;
- being furloughed or laid off;
- having work hours reduced;
- being unable to work due to lack of child care;
- closing or reducing hours of a business owned or operated by the individual; or
- other factors as determined by the Secretary of the Treasury.
Additional Factors
Note that the CARES Act invites the Treasury Department to identify other factors. The Treasury through its agency the IRS has added the following factors:
- reduction in pay or self-employment income;
- rescission of a job offer;
- delayed start date for a job; or
- any of these things (including the original CARES Act factors) happening to the individual’s spouse or other member of the individual’s household.
A member of the individual’s household, for these purposes, is someone who shares the individual’s principal residence. Working age children or life partners would qualify.
Note: Adverse financial consequences is to be measured on a household basis rather than on an individual basis.
Recontributions
The new guidance goes into some detail about recontributions providing many examples. Individuals have up to three years to recontribute qualified distributions. Recontributed dollars are not taxed, so earlier returns may have to be amended. The rules differ depending on whether the individual is recognizing income over three years or entirely in the year of distribution.
Taxpayers Recognizing Income in Year of Distribution
If a taxpayer includes all coronavirus-related distributions received in a year in gross income for that year and recontributes any portion during the three-year recontribution period, the amount of the recontribution will reduce the amount of the related distribution included in gross income for the year of the distribution.
Taxpayers Recognizing Income Over Three Years
If a qualified individual includes a coronavirus-related distribution ratably over a three-year period and the individual recontributes any portion to an eligible retirement plan at any date before the timely filing of the individual’s federal income tax return (that is, by the due date, including extensions) for a tax year in the three-year period, the amount of the recontribution will reduce the ratable portion of the coronavirus-related distribution that is includible in gross income for that tax year.
Carryovers
If the taxpayer recontributes an amount for a tax year in the three-year period that exceeds the amount that is otherwise includible in gross income for that tax year, the excess amount of the recontribution may be carried forward to reduce the amount of the distribution includible in gross income in the next tax year in the three-year period. Alternatively, the qualified individual is permitted to carry back the excess amount of the recontribution to a prior taxable year or years in which the individual included income attributable to a coronavirus-related distribution. The individual will need to file an amended federal income tax return for the prior taxable year or years to report the amount of the recontribution on Form 8915-E and reduce his or her gross income by the excess amount of the recontribution.