Coronavirus- Related Distributions

Questions & Answers

Q1: What is a Coronavirus-related Distribution?

Answer: A14 A Coronavirus-related Distribution (CRD) is a distribution made on or after January 1, 2020 and before December 30, 2020 to a qualified individual from an IRA, qualified plan, 403(b), or governmental 457(b) of up to $100,000 in the aggregate for any taxable year. 


Q2: What defines a “qualified individual”? 


Answer:  A qualified individual is a person who meets one or more of the following conditions due to SARSCoV- 
2 or COVID-19: 

1) diagnosed with the virus (via test approved by CDC); 

2) spouse or dependent is diagnosed with the virus (via test approved by CDC); 

3) experiences adverse financial consequences as ©PenServ Plan Services, Inc. CARES Act Q&As (04-2020)(7-2020) 3 a result of one of the following factors: quarantine, furlough, layoff, or reduced hours due to COVID-
19; being unable to work due to lack of child care due to COVID-19; or closing or reducing hours of a
business that you own or operate due to COVID-19. Additional factors released in IRS Notice 2020-50 include: 

4) the individual having a reduction in pay (or self-employment income) or having a job offer rescinded or start date for a job delayed due to COVID-19; 5) the individual’s spouse or a member of the individual’s household (as defined below) being quarantined,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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; and 6) closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the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. 


**Note: Notice 2020-50 also clarifies that the plan may rely on participant certification that those condition(s) are met unless the administrator has actual knowledge to the contrary.

Q3: Can you take a Coronavirus-related Distribution from a Roth IRA? 

Answer: Roth IRAs were not listed as eligible plans for Coronavirus-related Distributions. However, under the ordering rules for distributions, unless the taxpayer also receives earnings, nothing is taxable or subject
to the 10% premature distribution penalty.


Q4: Can you take more than one CRD from the same plan if you do not exceed the aggregate amount of $100,000?

Answer: A participant may take multiple CRDs, but the total amount from all eligible sources cannot exceed $100,000. 


Q5: Is there any special tax treatment applicable to a CRD? 

Answer: The 10% additional tax on early distributions does not apply; the amount of the CRD can be included in income over a three-year period; and such amount can be repaid to an eligible plan within three years of the distribution.

Q6: Is self-certification for a CRD from an IRA required by the Trustee/Custodian/Issuer? 

Answer: It is unclear at this time if IRA sponsors must collect this information. A best practice is to have the participant sign a form certifying they meet one or more of the conditions listed. For example, IRA distribution requests can be updated to reflect such certification, as permitted under Section 2202 of the Act. 


Q7: Must plan administrators certify a CRD? If so, is an election form required to make it clear that the participant is requesting a CRD? 

Answer: Administrators must know that a distribution is a CRD, but the participant will self-certify that information. Otherwise, it would be necessary for the payer to withhold, provide the withholding notice, etc. 


Q8: Is a CRD mandatory or optional? 

Answer: CRDs are optional from employer plans, but they are automatically permitted from IRAs 


Q9: If an employer plan permits CRDs, is it possible that the plan’s terms will preclude the distribution?

 
Answer:
The plan sponsor can lift in-service distribution restrictions to make way for a CRD. The CARES Act eliminated restrictions that normally apply to elective deferrals, QNECs, QMACs and ADP test safe harbor contributions. However, pension plans (e.g. Money Purchase plans, Defined Benefit plans) still may not permit in-service distributions.

Q10: Are CRDs available to terminated participants?

Answer: Subject to employer approval, terminated participants who qualify may treat a distribution as a CRD and utilize the special tax treatment affordable to these payments.
Q11: Can defaulted loans be considered as Coronavirus-related Distributions?


Answer:  A qualified individual is permitted to treat a qualified plan loan offset in 2020 as a CRD, and the CRD repayment and deferred taxation options would be available to them. The taxpayer will need to ensure that the 1099-R does not report the transaction using a Code L. Caution: This is not the same as an actual defaulted loan that causes a “deemed distribution” as described under § 1.72(p)-1 Q&A 10. Non-qualified individuals, can also apply the qualified loan offset distribution rules. In this case, the individual has until the due date to file their tax return (April 15, 2021) plus extensions (October 15, 2021) to complete a rollover of the defaulted amount.

Q12: Can a participant take both a CRD and a loan from the same employer’s plan?

Answer: Yes. Since a CRD is not considered a hardship distribution, it does not interfere with the ability to also take a loan from the same plan.


Q13: Aparticipant, who is a qualified individual, is currently on a Substantially Equal Periodic Payment (“72(t) distribution”) schedule to avoid the 10% premature distribution penalty. Will an additional amount distributed that is a CRD from the same account hinder the SEPP?

Answer: No. IRS Notice 2020-23 makes it clear (and IRS Notice 2020-50 clarifies) that the restrictions under 72(t)(2)(A)(iv) do not apply.


Q14: Can a non-qualified individual taking SEPPs either take additional amounts from the same account or
miss taking a payment without incurring a penalty?


Answer: Non-qualified individuals have relief from the restrictions under 72(t) that preclude modification, but only for the period between April 1 and July 15, 2020.

Q15: When both spouses are plan participants, but only one is a qualified individual, can they choose to take
a CRD only from the account of the non-qualified spouse?


Answer: The criteria states that the participant “Experienced an adverse financial consequence as a result of being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19 or SARS-CoV- 2”. However, in the case of a married couple filing a joint return, one could argue that they are jointly
experiencing an adverse financial consequence. IRS must clarify if this is applicable.


REPAYMENTS


Q1: What are the options to repay a CRD?

Answer: A CRD can be directly repaid (i.e., rolled over) to any IRA or other eligible plan that accepts rollovers. Unlike a regular eligible rollover distribution, however, a plan is not required to offer a participant receiving a CRD with a direct rollover option. While an employer plan has the ability to disallow
repayment to the same plan, the participant could then repay to an IRA or other eligible plan.


Q2: If a participant took a Required Minimum Distribution in 2020 that is beyond the 60-day rollover window, could it be treated as a CRD and therefore be repaid within three years? 

Answer: If the participant meets the requirements to receive a CRD, then the RMD can be treated as a CRD in all respects, including the 3-year repayment periods. 


Q3:Can a CRD from a pre-tax account be repaid to a Roth IRA and have the transaction treated as a
conversion for purposes of the 3-year tax spread?

 
Answer: Notice 2020-50 states that “an individual who is a qualified individual as a result of experiencing adverse financial consequences as described above, coronavirus-related distributions are permitted without ©PenServ Plan Services, Inc. CARES Act Q&As (04-2020)(7-2020) 5 regard to the qualified individual’s need for funds, and the amount of the distribution is not required to correspond to the extent of the adverse financial consequences experienced by the qualified
individual.” This can be interpreted to mean that the participant does not need to take constructive receipt of the funds, rather convert them directly into a Roth. Absent further guidance, this seems to be permissible, but since it seems contrary to the purpose of a CRD, proceed with caution.

Q4:For recordkeeping purposes, how is the repayment of a CRD characterized? 

Answer: The repayment of a CRD is regarded in the same way as a direct rollover.

REQUIRED MINIMUM DISTRIBUTION WAIVER


Q1: Are all Required Minimum Distributions (RMDs) waived for 2020?

Answer: All RMDs are waived for the calendar year 2020, including for a participant whose required beginning date is in 2020 (e.g. initial year 2019 RMDs due by April 1, 2020).

Q2: Does the RMD waiver apply to employer plans as well as IRAs?


Answer:  In addition to IRAs, for calendar year 2020, any RMD required under a 403(b), qualified plan, and governmental 457(b) is also waived. However, Defined Benefit and Cash Balance plans are not included in the temporary waiver. Also, employers have the opportunity to allow the waiver to apply to all participants/beneficiaries, to continue to distribute minimums, or to let each participant/beneficiary make the decision.

Q3: Does the RMD waiver include beneficiaries with inherited accounts? What about if the beneficiary is a
non-designated beneficiary such as an estate or trust?


Answer: Inherited accounts, regardless of whether the beneficiary is a designated or a non-designated beneficiary, are exempt from taking a required distribution for 2020.


Q4:If a beneficiary has already received the 2020 RMD, but meets the criteria of a qualified individual, can
they treat the RMD as a CRD?


Answer: A beneficiary can treat the RMD as a CRD for purposes of the 3-year tax spread. However, only a spouse beneficiary can roll back the payment within the 3-year period. Non-spouse beneficiaries cannot unless future guidance states otherwise.


Q5: Is the provision to waive the 2020 RMD only available to persons affected by the COVID-19 epidemic?

Answer: This does not apply only to qualified individuals affected by COVID-19, rather for all participants.

Q6: Will IRA plans need to be amended to reflect the 2020 RMD waiver?

Answer: IRA plans cannot be amended until IRS updates their model IRA forms.


Q7: Should employer plans be amended in connection with the decision regarding the RMD waiver?

Answer: The language in the plan relative to RMDs will dictate the necessity of an amendment. The plan must coordinate with what occurred operationally in 2020. Employer plan amendments will generally be required by December 31, 2022 (December 31, 2024 for governmental plans). IRS Notice 2020-51
provides guidance on the 2020 RMD waiver, including sample amendments.


Q8: In employer plans, does the RMD waiver apply equally for owner and non-owner employees?

Answer: The 5% owner rule has no bearing on the moratorium. Owners are not precluded from the waiver.


Q9:Is there a requirement to carry over the 2020 RMD to a subsequent year?

 
Answer: The 2020 RMD does not need to be made up in any future year.

Q10: How is a 5 or 10 year payout schedule for a beneficiary affected by the 2020 RMD waiver? 

Answer: Only the 5 year payout schedule was included in the Act, essentially extending it by one year. However, the 10 year period created under the SECURE Act was not mentioned. This may be addressed later. 

Q11:Can RMD amounts already taken be rolled back to the plan or IRA?
 
Answer: RMDs taken at any point during 2020 can be rolled back into an eligible plan. IRS Notice 2020-51 provides an extension to roll back any RMD taken on or after January 1, 2020 by August 31, 2020 without regard to the 60-day deadline that applies to IRA to IRA rollovers. RMD amounts that are received after August 31st are still eligible for rollover, but are subject to the normal rollover restrictions. Employer plans must permit the rollover. Otherwise, the RMD can be rolled over into an IRA.

Q12: If a 2020 RMD from an IRA is rolled back to the same or a different IRA, will that action count toward
the rule that prohibits more than one IRA to IRA rollover in a 12-month period? 


Answer: IRS Notice 2020-51 waives the 12-month rollover restriction that applies to IRA to IRA rollovers.

Q13: If an RMD was already paid out to a beneficiary, is it eligible to roll back into the inherited IRA account?
 
Answer: Typically, nonspouse beneficiaries cannot perform a rollover back into the inherited IRA, but Notice 2020-51 also provides an exception to that rule.

Q14: Does the RMD suspension for 2020 affect Qualified Charitable Distributions in any way? 

Answer: QCDs are not affected by the CARES Act. As it related to the change in RMD age under the SECURE Act, the participant can still request a QCD at age 70 ½ even if they do not have an RMD.