1099-R Code for CARES Act withdrawal

What 1099-R code should be used for a coronavirus related withdrawal for a participant under 59 1/2?  Can we use code 2 so they are not subject to penalty or use code 1 and let them sort it out when they do their tax return?

3 minutes ago, Susan S. said:

What 1099-R code should be used for a coronavirus related withdrawal for a participant under 59 1/2?  Can we use code 2 so they are not subject to penalty or use code 1 and let them sort it out when they do their tax return?

Susan: you've got to be kidding!  You are worried now about what you are going to do in January of next year?  I would suggest you wait for guidance. The legislation is a week old!

My own guess is that we are going to have (possibly) a special new code or how is the IRS going to track the 3 year payback rule?  I'm thinking there may also be an attached schedule similar to the form that carries the after tax contributions to an IRA forward from year to year.  My guess is that such a form will track repayments (with special codes on 1099s?) so that if at the end of the 3 years you have an outstanding amount, it will hit your 1040.

But we've got time for that one.

I have to send in a distribution request form to an investment company and it requires me to enter a code.

If not otherwise specified, use 7.  Then change it later in the year when we get guidance, if necessary.

My inclination is to use Code 1 and assume such matters will be dealt with on the tax return.  Or ask the investment provider how it should be handled.  

I did ask the investment provider and they had no guidance. People who are furloughed need this money yesterday so I can't wait around until they figure it out. Mike and Bird, I can see it both ways but am going with Code 1. 

Several of us across multiple firms were discussing this a few days ago and the majority were going to use Code 2 (it was not a consensus) since that specifically says the distribution qualifies for an exception to the 10% penalty. We know the CARES Act withdrawal does qualify. Code 1 says there is no known exception and I don't think that's correct.

We also think it's likely that the IRS will issue a specific code. But that doesn't help the providers that send the 1099 with the check.

I was in a webinar yesterday with Derrin Watson and Stephen Forbes - during the Q&A this came up.  It was recommended to use a Code "1" if the taxpayer is under 59 1/2 and then the taxpayer would address this when the individual's taxes are filed.  I believe there was a form mentioned that allows the taxpayer, when filing, r to advise the IRS that there was an exception. 

That being said, I agree that when the time arrives next January, there will be a "special" code that will be used however in this case Susan was needing a code right away.

My two cents...

I know most of the banks I work with give us a chance to amend or correct 1099-R codes in December along with updating address.

If the number gets large that could be a pain.  But if the people issuing the 1099-R allow for that it might help to start a list now per client of people to revisit this in December and hopefully we have guidance.   I wouldn't want to have to go back and find these people in December without a list guiding me.  

On 4/2/2020 at 5:18 PM, Susan S. said:

What 1099-R code should be used for a coronavirus related withdrawal for a participant under 59 1/2?  Can we use code 2 so they are not subject to penalty or use code 1 and let them sort it out when they do their tax return?

Code 1 if under age 59 1/2. Code 7 if age 59 1/2 or older.  This is a one time deal,. It is highly unlikely that the IRS is going to create an exception to the 1099-R reporting requirements for it. When the client files the tax return, Form 5329 would be filed to override the Code 1. Even if the IRS does say it should be Code 2, and the Custodian uses Code 1,  Form 5329 would still be filed.

6 hours ago, Appleby said:

Code 1 if under age 59 1/2. Code 7 if age 59 1/2 or older.  This is a one time deal,. It is highly unlikely that the IRS is going to create an exception to the 1099-R reporting requirements for it. When the client files the tax return, Form 5329 would be filed to override the Code 1. Even if the IRS does say it should be Code 2, and the Custodian uses Code 1,  Form 5329 would still be filed.

Because of the complexity from a tax situation of tracking the 3 year repayment, and into any plan, I do believe we will get a new code that tracks that particular issue.  I am guessing there will also be a 1040 schedule that reconciles that amounts each year until it disappears (by pay back) or becomes taxable or is treated as taxable.  But only time will tell.  

21 hours ago, Larry Starr said:

Because of the complexity from a tax situation of tracking the 3 year repayment, and into any plan, I do believe we will get a new code that tracks that particular issue.  I am guessing there will also be a 1040 schedule that reconciles that amounts each year until it disappears (by pay back) or becomes taxable or is treated as taxable.  But only time will tell.  

You might be right. But, remember we did not get one for the 1998 4 year conversion spread or the 2010 conversion spread.They were the usual 2/7.  Also, by the time they get around to it, these distributions will have already been processed.  Custodians/trustees will not be able to go back and recode them. But, the key is, even if they do, the OP can check 1 or 7 now-, and the 1 can be overridden with Form 5329.  I agree 100% on the 1040 schedule.

PS: Hope you are all staying safe and healthy ?

On 4/3/2020 at 1:41 PM, pmacduff said:

I was in a webinar yesterday with Derrin Watson and Stephen Forbes - during the Q&A this came up.  It was recommended to use a Code "1" if the taxpayer is under 59 1/2 and then the taxpayer would address this when the individual's taxes are filed.  I believe there was a form mentioned that allows the taxpayer, when filing, r to advise the IRS that there was an exception. 

That being said, I agree that when the time arrives next January, there will be a "special" code that will be used however in this case Susan was needing a code right away.

My two cents...

The form they mentioned was 8915-B, which is what they use for disaster distribution resolution.  It captures both the distribution and any repayments.  It was suggested that a new version of this form may come out.

6 hours ago, Appleby said:

You might be right. But, remember we did not get one for the 1998 4 year conversion spread or the 2010 conversion spread.They were the usual 2/7.  Also, by the time they get around to it, these distributions will have already been processed.  Custodians/trustees will not be able to go back and recode them. But, the key is, even if they do, the OP can check 1 or 7 now-, and the 1 can be overridden with Form 5329.  I agree 100% on the 1040 schedule.

I'm beginning to change my mind; I think we will end up with codes 1 and 2, and you report 1/3 of the amount (or more if you want) on each return for the next three years.  If you make repayment within the 3 year period, you will have to file an amended return to recover the taxes.  I have re-looked at what we did last time and I now think you are probably right that the burden will be on the taxpayer to get his money back. Thanks.

Any updates to this topic?

See response in other thread.