IRS Publication 5199: Distribution and Loan Relief
Understand the official IRS guidance on the tax implications and options for retirement funds accessed under the special 2020 relief provisions.
The Internal Revenue Service (IRS) issued Publication 5199 to provide guidance on retirement plan relief from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This guidance assisted individuals financially impacted by the pandemic by explaining the rules for special distributions and loans from retirement accounts during 2020. The publication detailed the tax implications and repayment options associated with these temporary measures. While all deadlines for the CARES Act relief have passed, this guidance remains relevant for those managing the long-term effects on their retirement savings and tax obligations.
Defining a Coronavirus-Related Distribution
A Coronavirus-Related Distribution (CRD) was a withdrawal from an eligible retirement plan that met criteria from the CARES Act. Individuals could take a CRD between January 1, 2020, and December 31, 2020, with a total cap of $100,000 from all plans. Eligible plans included traditional IRAs, 401(k)s, 403(b)s, and governmental 457(b) plans.
To take a CRD, an individual had to be a “qualified individual.” This applied to someone diagnosed with the SARS-CoV-2 virus or COVID-19, or whose spouse or dependent was diagnosed. However, a person could also qualify by experiencing adverse financial consequences from the pandemic. According to the CARES Act and IRS Notice 2020-50, these consequences included:
- Being quarantined, furloughed, laid off, or having work hours reduced.
- Being unable to work due to a lack of childcare.
- The closing or reduction of hours of a business owned or operated by the individual.
- Having pay reduced, a job offer rescinded, or a job start date delayed.
Tax Treatment and Reporting of Distributions
Ordinarily, a withdrawal from a retirement plan before age 59 ½ incurs a 10% additional tax on early distributions, but the CARES Act waived this penalty for CRDs. While the distribution was still subject to income tax, the law provided a special option for reporting and paying that tax.
The default treatment was to include the entire CRD in income for 2020. Alternatively, qualified individuals could elect to spread the income evenly over a three-year period, reporting one-third on their federal income tax returns for 2020, 2021, and 2022.
To make this election, individuals filed Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, with their 2020 tax return. Those who chose the three-year option then used Form 8915-F for the following two years to report the remaining portions of the distribution.
The decision to spread the income over three years or include it all in 2020 had to be made when filing the 2020 tax return and could not be changed after the return’s due date, including extensions. Additionally, all CRDs an individual received in 2020 had to be treated consistently.
Repayment of Distributions
Individuals had the option to repay a CRD to a retirement plan. A qualified individual had a three-year period, beginning the day after receiving the distribution, to recontribute all or part of it. This repayment could be made to any eligible retirement plan that accepts rollover contributions, not just the plan from which the funds were withdrawn.
When a CRD was repaid, it was treated as a trustee-to-trustee transfer and was not subject to annual contribution limits. The repayment reversed the tax consequences of the distribution, meaning the recontributed amount was not subject to income tax. If a taxpayer reported a CRD as income and later repaid it within the three-year window, they had to file an amended tax return for that year to claim a refund.
Relief for Retirement Plan Loans
The CARES Act also provided assistance for individuals with loans from their retirement plans, offering temporary flexibility for qualified individuals.
For new loans taken between March 27, 2020, and September 22, 2020, the maximum loan amount was temporarily increased from $50,000 to $100,000. This allowed qualified individuals to access a larger portion of their vested account balance if their plan permitted loans.
For individuals with existing plan loans, the legislation allowed for a suspension of loan repayments. Any repayment due between March 27, 2020, and December 31, 2020, could be delayed for up to one year. Loan repayments could resume after the suspension period, and the overall term of the loan could be extended by up to one year from its original due date.