IRS Expands Eligibility for Coronavirus-Related Retirement Distributions

June 19, 2020 | Kristine A. Tidgren

On Friday, June 19, IRS issued Notice 2020-50, expanding the definition of “qualified individuals” eligible for coronavirus-related distributions from eligible retirement accounts. The Notice also provides detailed guidance for coronavirus-related distributions and expanded plan loans made available by the CARES Act.

Coronavirus-Related Distributions

Section 2202(a) of the CARES Act provides special treatment for coronavirus-related distributions from eligible retirement accounts. For qualifying distributions (up to $100,000), the law:

  • Provides an exception to the 10% penalty for early withdrawals,
  • Allows the distribution to be included in income ratably over 3 years, and
  • Provides that the distribution will be treated as though it were paid in a direct rollover to an eligible retirement plan if the distribution is eligible for tax-free rollover treatment and is recontributed to an eligible retirement plan within the 3-year period beginning on the day after the date on which the distribution was received.  

Who is Eligible?

The CARES Act specifically provided that this special treatment was available for these “qualified individuals”:

  • An individual 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;
  • An individual whose spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • An individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • An individual who experiences adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
  • An individual who experiences adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

In the new guidance, Treasury and IRS, acting in accordance with authority granted in the CARES Act, expanded the relief to apply to an individual who experiences adverse financial consequences as a result of:

  • The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
  • The individual’s spouse or a member of the individual’s household 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, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  • closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

The guidance states that the definition of coronavirus-distribution under the CARES Act does not limit these distributions to amounts withdrawn solely to meet a need arising from COVID-19.  If an individual is a “qualified individual” as a result of experiencing adverse financial consequences as described above, coronavirus-related distributions are permitted without regard to the qualified individual’s need for funds. Furthermore, the amount of the distribution is not required to correspond to the extent of the adverse financial consequences experienced by the qualified individual.

Including the Distribution in Income

There are two methods for a qualified individual to include the taxable portion of a coronavirus-related distribution in income. 

  • A qualified individual who receives a coronavirus-related distribution is permitted to include the taxable portion of the distribution in income ratably over a 3-year period that begins in the year of the distribution. 
  • Alternatively, a qualified individual is permitted to elect out of the 3-year ratable income inclusion and include the entire amount of the taxable portion of the distribution in income in the year of the distribution. 
    • This election cannot be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of the distribution. 
    • All coronavirus-related distributions received in a taxable year must be treated consistently (either all distributions must be included in income over a 3-year period or all distributions must be included in income in the current year). 

Recontribution Within Three Years

If a coronavirus-related distribution is eligible for tax-free rollover treatment, a qualified individual is permitted, at any time in the 3-year period beginning the day after the date of a coronavirus-related distribution, to recontribute any portion of the distribution, but not an amount in excess of the amount of the distribution, to an eligible retirement plan.  This recontribution will not be treated as a rollover contribution for purposes of the one-rollover-per-year limitation.