If an individual received a 2020 1099-R, how does the CPA or individual know if the distribution reported on the 1099-R qualifies for special tax treatment under the CARES Act. The burden is on the taxpayer and his CPA to make the determination and to document their compliance with the CARES Act requirements.
There is no special 1099-R code for CARES Act distribution. So, a distribution that potentially qualifies for CARES Act special treatment may look just like a regular distribution from a retirement plan. Usually, it will be reported as a Code 1 “Early Distribution, no known exception” or Code 2 “Early distribution exception applies”. CARES Act Distributions are reported on Form 8915-E. As of February 24, 2021, only a draft of the 2020 Form 8915-E was available.
Requirements to CARES Act Distribution
The distribution must meet the following requirements:
- Be made from an eligible retirement plan – Eligible retirement plans includes IRAs, 401(k) plans, profit sharing plans, defined benefit plans, 403(a)s, 403(b)s and 457(b)s. It is not necessary that the eligible retirement plan considers the distribution a CARES Act Distribution for the tax payer to characterize it as such. There are a small number of distributions such as corrective distributions which are ineligible to be categorized as a CARES Act Distribution.
- Be made to a qualified individual – An individual, spouse, dependent or member of the individual’s household must have been diagnosed with COVID using a test approved by the CDC or experienced adverse financial conditions due to COVID. There is no need to demonstrate an actual financial need.
- Not exceed $100,000 in the aggregate – There is a $100,000 individual limit.
- Be made in calendar year 2020 – While there is ongoing need, the time period for these distributions has not been extended beyond December 31, 2020.
Special Tax Treatment Available
CARES Act distributions are eligible for three types of special tax treatment:
- CARES Act Distributions are exempt from the early distribution tax of 10% that generally applies to distributions made prior to age 59 1/2. Additionally, CARES Act Distributions are exempt from the 25% early distribution tax that applies to certain SIMPLE IRA distributions.
- A CARES Act Distribution is taxed ratably over three years instead of being completely taxed in 2020 unless a taxpayer elects to have it all taxed in 2020.
- CARES Act Distributions can be repaid within three years to reverse the tax consequences of the distribution. Or, another way to look at it is that the period to rollover the CARES Act Distribution has been extended from 60 days to three years. Repayments are reported on Form 8915-E.
CARES Act Distributions will provide additional planning opportunities, but also additional reporting requirements.