IRS Unveils New Relief for COVID-19 Retirement Borrowers

The COVID-19 pandemic has forced millions of Americans to take extraordinary steps just to stay afloat financially. For those taxpayers who might want to take distributions against their retirement plans or even borrow against their plans, the IRS has announced new relief.

The relief measures are outlined in IRS Notice 2020-50, allowing expanded access to plan distributions and plan loans. The new guidance expands the categories of individuals who are eligible for these kinds of distributions and loans (termed “qualified individuals”).

It also provides guidance and examples on how qualified individuals will report the tax treatment of such distributions and loans on their federal income tax returns.

The CARES Act says qualified individuals may treat distributions up to $100,000 made from their eligible retirement plans (including IRAs) between January 1 and Dec. 30, 2020 as coronavirus-related.

What’s at stake?

A coronavirus-related distribution is not subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59 ½. In addition, a coronavirus-related distribution can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.

The CARES Act also allows plans to relax certain rules for qualified individuals when it comes to plan loan amounts and repayment terms. In particular, plans can suspend loan repayments that are due from March 27 through Dec. 31, 2020; in addition, the dollar limit on loans made between March 27 and Sept. 22, 2020 is raised from $50,000 to $100,000.

Notice 2020-50 expands the definition of who is a “qualified individual.” Factors such as reductions in pay, rescissions of job offers, and an individual’s delayed start dates are taken into account.

The adverse financial consequences to an individual that arise from the impact of the coronavirus on the individual’s spouse or household member are also considered.

Who is qualified?

As expanded under Notice 2020-50, a qualified individual 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.

The Notice specifies that employers can choose whether these new coronavirus-related rules are implemented. It also notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if their plan provisions aren’t changed.

The guidance provides that administrators can rely on an individual’s certification that he or she is a qualified individual (and provides a sample certification). However, an individual must actually be a qualified individual in order to get favorable tax treatment.

Notice 2020-50 further provides employers with a safe harbor procedure for implementing the suspension of loan repayments that are otherwise due through the end of 2020. The notice also mentions there may be other reasonable ways to administer these rules.

For more information about how the CARES Act rules for COVID-related distributions and loans from plans can apply, employers, financial institutions and individuals should refer to Notice 2020-50.

This tax relief and other information related to the effects of COVID-19 on federal income tax is available on the IRS Coronavirus Tax Relief pages on the IRS website.

Story provided by TaxingSubjects.com

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