Among the numerous changes that have taken place throughout the last year, the CARES Act added an additional level of complexity to an already complicated retirement universe. The addition of Coronavirus-related distributions (CRDs) provides participants with the ability to repay qualified distributions anytime over the next three years, following the implementation of the CARES Act.
In order to understand the repayment and reporting of CRDs, it is vital to first understand some of the details regarding these distributions. Following are some of the particulars of these newly established plan options:
- Qualified Individuals may take a distribution of their plan assets up to $100,000.
- The distribution must have taken place between Jan. 1, 2020 and Dec. 30, 2020.
- The distribution is reported on Form 1099-R early in 2021.
- No 10% penalty nor mandatory tax withholding is required.
- Since the distribution is subject to voluntary withholding and it is a nonperiodic distribution, the participant must waive the withholding or 10% will be withheld from the distribution.
- The payment of taxes may be spread over a 3-year period.
- The taxpayer files Form 8915-E to determine and report the included income for the year.
To complicate matters more, not only can the participant report the distribution amount over a 3-year period, but in fact the participant is also allowed to pay back some or all of the CRD anytime in the three years following the date of distribution. If the participant pays back the full CRD amount, then the participant will pay no taxes on the distribution. This increases the burden on administrative services and accounting reconciliation.
This of course raises many questions with respect to reporting issues for the plan and the participant. For the plan, the full CRD will be reported on a 1099-R for the year in which the CRD was taken by the participant. As for the participant, they will report this on Form 1040 or their personal taxes using Form 8915-E to determine the taxable amount for the current year. For example:
If a participant took a CRD in August 2020 of $75,000 and wanted to spread the income over a 3-year period, they would report $25,000 in 2020, $25,000 in 2021 and $25,000 in 2022.
If the same participant had a much better year in 2021 and decided to pay back $25,000 of the CRD in that year, they would leave their 2020 taxes the same, report $0 in distributions for 2021 and then the remaining $25,000 would be reported in 2022 (unless, of course, they paid back the remaining $25,000 before tax reporting in 2022).
As mentioned above, it is also possible for the participant to pay back the full amount before their 3-year time limit has passed. In such a case, the participant in the above example may pay back their full amount before their time limit had lapsed in 2023. This can take place after the participant’s personal taxes have been submitted for 2020 through 2022. However, in order for participants to receive their previously paid taxes back, they must file amended returns for each of those years.
It is important to note that participants must repay their CRDs to an eligible retirement plan similar to the plan from which it was taken. It is also required for the repayment to be deposited in similar funds (e.g., pre-tax funds must be deposited in a pre-tax account). Eligible retirement plans include 403(b)s, qualified plans and IRAs. If the employer’s plan will not accept the repayment, the participant may repay the amount(s) into an IRA. (We will cover IRA reporting in a separate article for the repayments.)
Though these new options for participants are causing an administrative burden for administrators and participants alike, they have been a huge help and a lifeline to many during this crisis of a worldwide pandemic—a crisis that has left many in urgent need across the country. As we continue to recover and support one another, the hope is that the use of retirement funds was not as necessary as we thought and they were only distributed as a last resort. The hope of many in our industry is that we can start looking to the future and start planning for retirement again.
Nathan Glassey, TGPC, QKA, is Vice President, Retirement Services, at National Benefit Services.
Opinions expressed are those of the author, and do not necessarily reflect the views of the NTSA or its members.