At the onset of the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed to provide economic relief to people across the United States. With the continued impact of COVID-19, the IRS has issued further guidance on the provisions of the CARES Act to expand the opportunity for economic relief.

In March, it was announced that the CARES Act will provide favorable tax treatment for qualified individuals receiving up to $100,000 of coronavirus-related distributions from retirement plan accounts between January 1, 2020 and December 31, 2020, including: exemption from the 10% early distribution penalty; the option to report the taxable distribution over three
years; and the option to roll the funds back within three years to avoid taxation on the distribution.

The CARES Act defines a qualified individual as an individual:

  • Who is diagnosed with COVID-19;
  • Whose spouse or dependent is diagnosed with COVID-19; and
  • Who is experiencing adverse financial consequences as a result of:
    • Being quarantined, furloughed, laid off, or having work hours reduced;
    • Being unable to work due to lack of childcare; and
    • Closing or reducing hours of business.

In late June, the IRS issued notice of expanded eligibility under the definition of a qualified individual to include an individual:

  • Who is experiencing adverse financial consequences as a result of:
    • Reduction in pay or self-employment income or having a job offer delayed or rescinded; and
    • Having a spouse or member of the household experience adverse financial consequences for any of the reasons previously stated.

The notice further clarified that any qualified individual may take a coronavirus-related distribution whether there is a financial need for it or not.

Required Minimum Distribution Waivers

In addition to the distribution relief detailed above, the CARES Act provides for a waiver of required minimum distributions (RMDs) in 2020 for retirement account owners and beneficiaries.

When the CARES Act was first announced in March, it did not provide specific guidance on what options may be available to those who had already taken an RMD distribution in 2020. However, in late June, the IRS announced that anyone who had already taken a 2020 RMD as an owner or beneficiary of a retirement account will have the opportunity to roll the funds back in order to avoid taxation. The notice also waives the one rollover per year rule for purposes of returning an RMD already taken. The rollover must be completed by August 31, 2020, in order to qualify under the notice.

We will continue to provide relevant updates as they’re announced. If you have any questions on the application of the new guidance and how it may impact your specific financial situation, please contact us.

Related content: Highlights of the CARES Act

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.