Can I Repay Coronavirus-Related Distribution For Retirement?

Tax planning can be difficult, especially during a pandemic. As a premier certified public accountant in Colorado Springs, Bennett CPA is passionate about ensuring all businesses and individuals are prepared and equipped for their yearly taxes. Tax laws are constantly changing, and even minute differences can impact your finances from year to year. CPAs are experiencing many Coronavirus-related questions this year, including questions regarding relief for retirement plans and IRAs.

In our current climate, many people are questioning whether they are able to repay Coronavirus-related retirement distributions. These distributions have the ability to immensely impact people’s financial health, so it is important to understand whether or not they can be repaid. In an effort to better serve my clients in Colorado Springs, I have answered some of the most popular Coronavirus-related finance questions below to help guide your tax planning.

What Are Coronavirus-Related Distributions?

In order to understand Coronavirus-related distributions, we must first understand general distributions. Distributions are withdrawals from qualified retirement plans, such as a 401(k), or a 403(b). A distribution occurs when you take money from a retirement account and use it as retirement income. All qualified distributions come with conditions the IRS has set in place to ensure investors do not avoid paying their taxes.

Coronavirus-related distributions are withdrawals made between January 1, 2020, and December 30, 2020, from an eligible retirement plan by a qualified individual. A distribution can be up to a combined limit of $100,000 in a year from all plans and IRAs.

Employers are permitted to decide whether or not to amend their plans in order to provide for expanded Coronavirus-related distributions. Whether your employer decides to provide for these or not, you may still be able to treat your distribution as Coronavirus-related on your tax return. In order to do so, you must be a qualified individual, and your distribution must meet certain requirements.

What Do Coronavirus-Related Distributions Include?

Below are the only requirements for Coronavirus-related distributions. Distributions are only considered Coronavirus-related if they are:

  • From a retirement plan account

  • From an Individual Retirement Account (IRA)

  • Distributions that would have been Required Minimum Distributions (RMDs) in 2020, except for any relief RMD under the CARES Act that you did not put back into an IRA or other plan

  • Loan offsets from a plan loan after leaving employment

A loan offset is a lending agreement--typically for a mortgage--that allows a borrower to maintain a savings account with the lender. If and when you leave your job with an unpaid loan balance, your former employer may allow a period of time for you to pay off the loan. If you cannot pay off the loan, this is called a loan offset. If you did have an outstanding balance on a loan when you left employment, that loan balance is usually offset against your benefits.

What Do Coronavirus-Related Distributions Not Include?

It is important to note what is not included, so you can fully understand what distributions may or may not be repaid. Coronavirus-related distributions do not include:

  • Any costs of current life insurance protection

  • Corrective distributions for excess contributions that fall under Section 401(k)

  • Excess aggregate contributions under Section 401(m)

  • Distributions of premiums for accident or health insurance

  • Loans that are deemed distributions under Section 72(p)

  • Any dividends that are paid on applicable employer securities under Section 404(k)

  • Prohibited allocations that are deemed distributions in accordance with Section 409(p)

  • Corrective distributions from elective deferrals and employee contributions which are returned to the employee in order to observe limitations stated in Section 415

  • Corrective distributions from salary deferrals if they are elective and in excess of the 402(g) limits

Can I Repay Coronavirus-Related Distributions?

You may be able to repay part or all of your distribution to an eligible retirement plan. In order to do this, though, you must complete the repayment within three years from the date that the distribution was officially received. The distribution will then be treated as if it were being repaid within a trustee-to-trustee direct transfer. This means you would not owe federal income tax on the Coronavirus-related distribution.

If you received a Coronavirus-related distribution during 2020, for example, you could include the amount of the distribution in your income across a three-year period (2020, 2021, and 2022). Then, if you chose to repay the full amount to an eligible retirement plan, you would be able to file an amended federal income tax return for both 2020 and 2021. You could claim a refund of the tax attributed with the distribution included in your income for those years. You would not need to include any further amount in your income in 2022.

Are Coronavirus-Related Distributions Taxed?

Yes, distributions that are Coronavirus-related are considered taxable income. They are included as taxable income over a three-year period, one-third each year. They would also be taxable income if elected in the year you decide to take the distribution. These distributions are not, however, subject to the additional 10 percent tax on early distributions usually applied to most withdrawals before the age of 59 ½.

It is also important to note that Coronavirus-related distributions are not subject to mandatory tax withholding. If it is within three years, these distributions can also be repaid to an IRA or to a workplace retirement plan. This would make a distribution eligible for a tax-free rollover treatment.

Distributions And More With Bennett CPA

Understanding the world of taxes can be difficult. This year, there are many Coronavirus-related relief programs and amendments to tax laws, making understanding the details of your taxes even more complicated. At Bennett CPA, I believe in providing you with all of the information needed so you can fully understand the ins and outs of taxes. Whether you have questions pertaining to individual services, like individual returns and ongoing tax planning, or want to learn more about business services, such as business tax returns and business tax planning, I am here to help you with all of your tax needs. Contact Bennett CPA today to get ahead on your taxes!