The Internal Revenue Service (IRS) recently released new guidance in IRS Notice 2020-50 and Notice 2020-51 to help owners and beneficiaries of individual retirement accounts and individual retirement annuities (IRAs) and IRA providers navigate the relief provided under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
This LawFlash is intended to cover IRS guidance issued after our recent LawFlashes, COVID-19: A Roadmap to Relief for IRA Owners and Providers and COVID-19: IRA Providers Have Until August 31, 2020 to File Form 5498 for 2019 were prepared. Please see these earlier LawFlashes for more on the COVID-19 CARES Act relief and earlier IRS guidance.
By way of background, the CARES Act permits IRA owners to skip RMDs that they would have been required to take in 2020 from their IRAs, including 2019 RMDs due on April 1, 2020 for IRA owners who turned age 70½ in 2019 and did not take the RMD in 2019. Beneficiaries of deceased IRA owners may also skip RMDs that they would have been required to take from their inherited IRAs in 2020. This relief applies to Traditional, SIMPLE and SEP IRAs and inherited Traditional, Roth, SIMPLE and SEP IRAs. No relief is necessary for Roth IRA owners because they are not required to take RMDs from their Roth IRAs during their lifetimes. All or any portion of a distribution to an IRA owner that would have been an RMD in 2020 may be rolled over within 60 days of receipt (subject to the extension explained below), if applicable rollover requirements are met. IRS Notice 2020-51 provides guidance on the 2020 RMD waivers and rollovers.
60-Day Rollover Deadline Extended Until August 31, 2020 to Roll Over 2020 ‘Would-Be’ RMDs
To help IRA owners who have “already received” RMDs in 2020 that they were permitted to skip under the CARES Act, IRS Notice 2020-51 extends the last day of the 60-day rollover deadline until August 31, 2020. This is particularly good news for IRA owners who took RMDs in January since January payments were not covered by prior rollover relief. Presumably, IRA owners now have until the later of August 31, 2020 or 60 days after they received the would-be 2020 RMDs to roll them over.
Restriction on Number of IRA Rollovers in 12-Month Period Lifted Until August 31, 2020 for 2020 ‘Would-Be’ RMDs
Notice 2020-51 also helps IRA owners who have already received a series of would-be RMDs in 2020 by lifting the one-rollover-per-12-month period restriction for rollovers of the would-be RMDs. This is good news for IRA owners who received RMD installment payments (or other IRA payments) in 2020. Without this relief, only one RMD installment payment would have been eligible for rollover. However, it appears that the restriction is lifted only for rollovers made by the August 31, 2020 deadline.
Note: If the IRS did not intend for the relief from the one-rollover-per-12-month-period restriction to end on August 31, 2020, the IRS will hopefully clarify its guidance soon.
2020 ‘Would-Be’ RMDs, if Rolled Over, Must Be Rolled Back to Distributing IRA
Notice 2020-51 seems to require that any rollover of “already received” 2020 RMDs be rolled back over to the IRA that distributed the would-be 2020 RMD. This is bad news for IRA owners who may have already rolled over the would-be 2020 RMDs to another IRA or a qualified retirement plan.
Note: This restriction comes as a surprise and seems at odds with the CARES Act relief that waived RMDs in 2020. The restriction is also inconsistent with the approach taken in Notice 2020-51 for rollovers of would-be RMDs from qualified retirement plans. Qualified retirement plan participants are permitted to roll over the would-be RMDs to any eligible retirement plan. If the IRS did not intend the “distributing IRA” language in Notice 2020-51 to apply as a restriction, the IRS will hopefully clarify its guidance soon.
Rollover Relief Extended to 2020 ‘Would-Be’ RMDs Under SECURE Act
All of the relief discussed above also applies to IRA owners who turn age 70½ in 2020 and receive RMDs in 2020 that they did not have to take under the change in the required beginning date rules made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). This is good news for IRA owners in this situation. We covered this SECURE Act change and others in our LawFlash The Good News and Really Bad News for IRA Owners Under the SECURE Act – Next Steps for IRA Providers.
2020 Inherited IRA ‘Would-Be’ RMDs May Be Rolled Over by August 31, 2020
IRS Notice 2020-51 makes clear that IRA beneficiaries who have already received RMDs in 2020 that they were permitted to skip under the CARES Act or SECURE Act may roll over the would-be RMDs no later than August 31, 2020. This is very good news for non-spouse IRA beneficiaries because without this relief they would not be able to roll over the would-be RMDs.
Note: If the IRS did not intend to impose the August 31, 2020 deadline on inherited IRA non-spouse beneficiary rollovers of would-be 2020 RMDs, hopefully the IRS will clarify its guidance soon.
2020 Inherited IRA ‘Would-Be’ RMDs, if Rolled Over, Must Be Rolled Back to Distributing Inherited IRA
As with the relief for IRA owners discussed above, Notice 2020-51 seems to require that any rollover of “already received” 2020 RMDs be rolled back over to the inherited IRA that distributed the would-be 2020 RMD. This restriction is better understood in the inherited IRA context since non-spouse beneficiaries are not otherwise permitted to roll over any amounts between inherited IRAs. Absent the relief, amounts may only be moved between inherited IRAs by direct transfers.
IRA Providers Required to Notify IRA Owners
IRS Notice 2020-51 requires IRA providers to notify IRA owners that no RMD is due for 2020 and provides that this requirement may be satisfied by furnishing IRA owners with a copy of the IRS Form 5498 filed with the IRS.
IRA Providers Do Not Have to Amend IRA Documents
IRS Notice 2020-51 also provides that IRAs do not have to be amended to reflect the waiver of 2020 RMDs.
The CARES Act permits Traditional, SIMPLE, and SEP IRA owners who have suffered from COVID-19 (either physically or financially) to take tax-favored “coronavirus-related distributions” on or after January 1, 2020, and before December 31, 2020 of up to $100,000 in the aggregate from their IRAs and eligible qualified retirement plans, 403(b) plans and eligible 457(b) plans in accordance with certain requirements. Coronavirus-related distributions are exempt from the 10% early distribution tax penalty and taxed ratably over three years (unless the IRA owner elects immediate taxation) and repayable within three years. An IRA owner may take a coronavirus-related distribution regardless of his or her need for funds. IRS Notice 2020-50 provides guidance on coronavirus-related distributions.
Expanded Eligibility for Coronavirus-Related Distributions
IRS Notice 2020-50 expands the categories of individuals eligible for coronavirus-related distributions (i.e., “qualified individuals”) from their IRAs to include an IRA owner who suffers adverse financial consequences resulting from the impact of COVID-19 on the individual’s spouse or any member of the individual’s household. In addition, the expanded categories include an IRA owner who suffers adverse financial consequences as a result of the IRA owner having a reduction in pay (or self-employment income), a job offer rescinded or start date of a job delayed due to COVID-19.
Accordingly, an IRA owner is now a “qualified individual” if the IRA owner, the IRA owner’s spouse or the IRA owner’s dependent has tested positive for COVID-19 using a CDC-approved test (including a test authorized under the Federal Food, Drug, and Cosmetic Act. An IRA owner is also a “qualified individual” if the IRA owner has experienced adverse financial consequences because, due to COVID-19, the IRA owner, the IRA owner’s spouse or a member of the IRA owner’s household (1) was quarantined, furloughed or laid off, or had work hours reduced; (2) was unable to work due to lack of childcare; (3) had a reduction in pay (or self-employment income); (4) had a job offer rescinded or start date for a job delayed; or (5) had a business that they owned or operated close or reduce hours.
No Requirement to Demonstrate Financial Need for Coronavirus-Related Distribution or Correspond Amount with Need
The Notice also clarifies that an IRA owner who qualifies for a coronavirus-related distribution does not have to demonstrate financial need for the funds and the amount of the distribution does not have to correspond to the need arising from COVID-19.
Other Distributions May Be Designated as Coronavirus-Related Distributions
IRS Notice 2020-50 clarifies that an IRA owner who is a “qualified individual” may designate any distribution that would meet the requirements of a coronavirus-related distribution as a coronavirus-related distribution. This includes amounts received by the IRA owner on or after January 1, 2020, and before December 31, 2020 that are periodic payments and distributions that would have been required minimum distributions (RMDs) but for the relief provided in the CARES Act.
Coronavirus-Related Distributions Will Not Void Substantially Equal Periodic Payment (SEPP) Arrangements
According to Notice 2020-50, an IRA owner may take coronavirus-related distributions without voiding a substantially period equal payment (SEPP) arrangement in place for purposes of avoiding the additional tax under Section 72(t) of the Internal Revenue Code of 1986, as amended, for distributions before age 59½.
Repayments Treated as Direct Transfers
If an IRA owner elects to repay any portion of a coronavirus-related distribution, the repayment is not taxable and is treated as a direct trustee-to-trustee transfer made within 60 days. The repayments are required to be made to an IRA or other eligible retirement plan to which a rollover of the original distribution could have been made, but the one-rollover-per-12-month-period limitation on rollovers between IRAs does not apply.
Tax Reporting for Coronavirus-Related Distributions
IRS Notice 2020-50 confirms that IRA owners who receive coronavirus-related distributions report the distributions on their federal income tax return for 2020 and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments). IRA owners also use Form 8915-E to report any repayment made during a tax year and to determine the amount of any coronavirus-related distribution includible in income for a tax year.
The Notice further confirms that an IRA owner will be required to file an amended income tax return and a revised Form 8915-E to report the amount of the repayment and claim a refund of the tax attributable to the repaid coronavirus-related distribution previously included in income. There are several examples in IRS Notice 2020-50 explaining the tax treatment of coronavirus-related distributions and repayments under the one-year and the three-year income inclusion methods.
Coronavirus-Related Distributions Available to Eligible IRA Beneficiaries
IRS Notice 2020-50 clarifies that an IRA beneficiary who is a “qualified individual” may take a coronavirus-related distribution. This is good news for IRA beneficiaries who are affected by COVID-19 and need the funds.
IRA Beneficiaries May Not Repay Coronavirus-Related Distributions
IRS Notice 2020-50 provides that any coronavirus-related distribution paid to a qualified individual as an IRA beneficiary (other than the surviving spouse of the IRA owner) cannot be recontributed to the IRA or another plan.
Form 1099-R Required Even if Repayment in Same Year
Notice 2020-50 confirms that IRA providers must report the payment of a coronavirus-related distribution on Form 1099-R. This reporting is required even if the IRA owner repays the coronavirus-related distribution to the same IRA in the same year.
Form 1099-R Codes
IRS Notice 2020-50 also confirms that IRA providers are permitted to use distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R to report coronavirus-related distributions, if no other appropriate code applies.
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Craig A. Bitman