The IRS Expanded CARES Act Tax Breaks

The IRS Expanded CARES Act Tax Breaks

Notice 2020-50 Impacts Retirement Plan Distributions & Loans

cares act tax breaksLast Friday the IRS expanded the number of taxpayers that qualify to tap into their retirement plans under the provisions of the CARES Act. They also provided guidance about distributions and loans under the CARES Act.

The Act allows qualified individuals to take up to $100,000 in distributions from their eligible retirement plans (including IRAs) between January 1 and December 30, 2020, when the distribution is taken for coronavirus-related reasons. A new provision waives the 10% penalty on an early distribution that would otherwise apply if taken before a person reaches age 59½.

A coronavirus-related distribution can be included in income in equal installments over a three-year period. Qualified individuals have three years to repay such a distribution to a plan or IRA and undo the tax consequences of the distribution.

The CARES Act also says plans can implement some relaxed rules for plan loan amounts and repayment terms. Plans may suspend loan repayments that are due from March 27 through December 31, 2020. The dollar limit on loans made between March 27 and September 22, 2020 has been raised from $50,000 to $100,000.

The IRS expanded the definition of a qualified individual, including someone 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, furloughed or laid off, or having work hours reduced due to COVID-19; being unable to work due to lack of childcare because of 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own or operate due to COVID-19; having pay or self-employment income reduced due to COVID-19; or having a job offer rescinded or start date for a job delayed due to COVID-19.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 IRS also clarified that employers can decide whether to implement these coronavirus-related distribution and loan rules, and said that qualified individuals can claim the tax benefits of the distribution rules even if plan provisions aren’t changed. The IRS clarified that administrators can rely on an individual’s certification that they’re a qualified individual, but said that an individual needs to be a qualified individual to get favorable tax treatment.

The IRS notice also gives employers a safe harbor procedure for implementing the suspension of loan repayments that were due by the end of 2020, but said that there may be other ways to administer these rules.

Sources: Forbes.com, accountingtoday.com. IRS.gov

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