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Coronavirus-Related Distributions


EBECatty

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I may be missing something, but hopefully someone can confirm. I've seen the newly permissible CARES Act "coronavirus-related distribution" referred to as a new form of "in-service" distribution (or some variant thereof). It pretty clearly seems to apply to in-service distributions, but I don't see anything that would limit a coronavirus-related distribution to in-service. Perhaps people are just referring to it in that shorthand as that seems to be the most useful practical application?

In other words, if a 50-year-old participant terminated two years ago with a $200,000 401(k) balance, does anything prevent them from taking a $100,000 distribution (assuming they are affected by the virus, etc.) and taking advantage of the favorable tax treatment of this new distribution type?

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Most of what I have seen, at least before the final language was available, referred to it as a hardship distribution.

22 minutes ago, EBECatty said:

In other words, if a 50-year-old participant terminated two years ago with a $200,000 401(k) balance, does anything prevent them from taking a $100,000 distribution (assuming they are affected by the virus, etc.) and taking advantage of the favorable tax treatment of this new distribution type?

I don't think so.  Since "laid off" is one of the qualifying reasons, I don't see how it could exclude a terminated employee.  But if it does, you could roll to an IRA and then take tax favorable distribution right?

 

 

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That was my thought as well. The language covers someone "laid off" and also explicitly applies to IRAs. So it can't be just a new distributable event, as both "those laid off" and "those with IRAs" already have permissible distributable events, but rather a wholly separate type of distribution for anyone with a plan balance. 

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@EBECattyI came here to post a question along the line your original "post.

Can a "qualifying individual" take a CRD from his/her 401(k) and subsequently roll it into a traditional IRA thus avoiding taxes?  Would the RK send the proceeds (via direct rollover) to an IRA custodian?  Or does the check (wire) have to be sent to the individual?  

PS I understand the rule allows the income taxes to paid over 3 years - in this scenario the individual would be doing a tax-free(?) IRA rollover in the same year.

I'm thinking participants (Whose plans don't offer in-service) distributions are looking for a workaround - ultimately getting the money into a IRA 

All assistance is appreciated. 

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33 minutes ago, A Shot in the Dark said:

It is my understanding that coronavirus-related distributions under the CARES Act are not eligible rollover distributions.

This treatment is limited to certain provisions only, including 402(f) notices; 3405 mandatory 20% withholding; and the requirement to offer direct rollovers under 401(a)(31). If I recall correctly, the 2009 RMD waiver in WRERA had similar terms and I believe the IRS position was that plans could offer direct rollovers but were not required to offer them. 

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5 hours ago, A Shot in the Dark said:

It is my understanding that coronavirus-related distributions under the CARES Act are not eligible rollover distributions.

But doesn't the Act specifically allows for it to be repaid - and treated as a rollover - in the three years subsequent? So maybe not a rollover eligible distribution in the traditional (or technical sense), but certainly a rollover (rollover contribution? not sure what the terminology should be) is allowed for the CRD amount. Thus, in effect, making it a rollover. 

I could see this being particularly useful for folks who try to get around the typical 60 day rollover issues - there is no withholding, and they can use the money for longer than 60 days with a CRD. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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@justanotheradmin

Exactly.  It's not a rollover in the traditional sense but the distribution can be repaid/"re-contributed" - another term for a rollover.

I am struggling with the taxation piece of the equation 

For example, a qualifying individual takes a $100,00 "CRD" and subsequently rolls it in IRA on or before 12/31/ 2020.

Is the distribution included in 2020 income?    Or is the otherwise taxable income offset by the "rollover"

Maybe I am just overthinking this however I've received a few inquires - looking ensure that I am providing accurate information.

Thank you

 

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7 minutes ago, Dobber said:

@justanotheradmin

Exactly.  It's not a rollover in the traditional sense but the distribution can be repaid/"re-contributed" - another term for a rollover.

I am struggling with the taxation piece of the equation 

For example, a qualifying individual takes a $100,00 "CRD" and subsequently rolls it in IRA on or before 12/31/ 2020.

Is the distribution included in 2020 income?    Or is the otherwise taxable income offset by the "rollover"

Maybe I am just overthinking this however I've received a few inquires - looking ensure that I am providing accurate information.

Thank you

 

(A) IN GENERAL.—Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), of the Internal Revenue Code of 1986, as the case may be.

(B) TREATMENT OF REPAYMENTS OF DISTRIBUTIONS FROM ELIGIBLE RETIREMENT PLANS OTHER THAN IRAS.—For purposes of the Internal Revenue Code of 1986, if a contribution is made pursuant to subparagraph (A) with respect to a coronavirus-related distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer shall, to the extent of the amount of the contribution, be treated as having received the coronavirus-related distribution in an eligible rollover distribution (as defined in section 402(c)(4) of such Code) and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.

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If rolled over or recontributed within 3 years but after taxes were paid on the amount for 2020 and possible 2021, would an after-tax basis be created? I am assuming it would but have not found anything definitive. And if after tax basis exists, would that cause the receiving plan to potentially reject the receipt of the funds? 

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41 minutes ago, Kac1214 said:

If rolled over or recontributed within 3 years but after taxes were paid on the amount for 2020 and possible 2021, would an after-tax basis be created? I am assuming it would but have not found anything definitive. And if after tax basis exists, would that cause the receiving plan to potentially reject the receipt of the funds? 

The idea would be that you could amend your returns and get the tax money back.  I don't believe the intent is to be creating after-tax basis and have no idea how a plan would know that someone essentially didn't claim it as a rollover; I assume they would have to confirm that it is (just like they do with a regular rollover).  Forget about the CARES Act for a sec and imagine if someone rolled money over, confirmed it was a rollover, but paid the tax on it...not the plan's problem.

Ed Snyder

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Dear Kac1214,

                      I share Bird’s conclusions.  Individuals who make after-tax contributions to plans have basis in employer-benefit plan benefits.  Such basis would continue after rollover of by the individual of a benefit distribution to eligible retirement plan, including an IRA. Most recipient plans make no attempt to keep track of such basis, although they often segregate benefits associated with a participant’s rollover.  Thus, the presence of basis does not usually affect the decision of a plan to accept a rollover.  Individuals are responsible for keeping track of the basis of such rollovers.  One could raise the same issue about creating basis with any eligible rollover distribution (as defined in section IRC Section 402(c)(4)) if the individual included some of the distribution in taxable income of the year of the receipt. That inclusion would not be consistent with the exclusion of income rules of IRC Section 402(c)(1) and thus would not be permitted.  Similarly, I would conclude an individual who wishes pursuant to the CARES Section 2202(3) to recontribute a coronavirus-related distribution from an eligible retirement plan (including an individual retirement arrangement) within three years to an eligible retirement plan would be compelled to amend any returns to the extent the individual included any portion of such distribution in the individual's gross income.

 

            Best wishes,

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It is my understanding from the above that you believe an employee that terminated prior to the CARES Act for reasons other than COVID-19 can take a distribution from the plan and utilize the 10% penalty waiver as well as paying the taxes back over 3 years (ie, no 20% mandatory withholding)? 

If the COVID 19 distribution is a hardship distribution, it doesn't seem logical that a previously terminated employee could benefit.  Thoughts?

 

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16 hours ago, S. Weekley said:

If the COVID 19 distribution is a hardship distribution, it doesn't seem logical that a previously terminated employee could benefit.  Thoughts?

Well, it's not a hardship distribution - so no, I don't agree. 

16 hours ago, S. Weekley said:

It is my understanding from the above that you believe an employee that terminated prior to the CARES Act for reasons other than COVID-19 can take a distribution from the plan and utilize the 10% penalty waiver as well as paying the taxes back over 3 years (ie, no 20% mandatory withholding)? 

Yes, if they are an eligible person and the plan allows for CRD.  The reason or date of their termination doesn't matter. And furthermore, I think for anyone who already took a distribution, or takes a distribution from a plan that doesn't specifically allow CRD, then the participant will have the option on their own personal return to classify the distribution as a CRD, without any plan involvement at all.  

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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