CARES Act Retirement Plan Distribution - Need Accountant input

[Tiger8693]

I have a question concerning what would be a scenario related to taking a Coronavirus distribution from 401k based on the CARES Act. Scenario follows:

My question is very specific, and related to the provision that allows return of the funds to an eligible account within 3 years without taxable event.

1. Assume a $100k max withdrawal.

2. The funds can be claimed as income over 3 years, so $33.3K in 2020, $33.3K in 2021, $33.3K in 2022

3. If your situation changes and income comes back to allow for return of funds, could you: Claim $33.3k of income on 2020 tax return, but negate this with $33.3k of rollover (prior to April 2021) to be adjusted out of your 2020 income?

Then the same for 2021 and 2022, essentially avoiding the tax in any of the 3 years?

Are their any Tax Accountants out there? If so, is there enough information about the distribution rules to answer this question?

 

[cathy63]

I am not an accountant, but I believe the IRS answers this question in a fairly straightforward way here: https://www.irs.gov/newsroom/corona...tirement-plans-and-iras-questions-and-answers

Q7. May I repay a coronavirus-related distribution?
A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.

This is actually more flexible than what you want to do, because you can wait until year 3 to return the entire amount and just amend the prior returns. If you do return 1/3 in each year, then yes, you would negate each year as you go, just as they describe doing for 2022 in the example above.

 

[pb4uski]

Just be sure that the distribution qualifies as a coronavirus-related distribution. If I recall correctly there specific rules that apply

 

[Tiger8693]

Just be sure that the distribution qualifies as a coronavirus-related distribution. If I recall correctly there specific rules that apply

The rules seem to be pretty generous.

- You or your spouse test Positive
- You or your spouse lose a job

and with the additional changes:

- You or your spouse have reduced work hours due to Covid

In my case, my wife was reduced first by about 75%, and now by "only" 40%

 

[Tiger8693]

This is actually more flexible than what you want to do, because you can wait until year 3 to return the entire amount and just amend the prior returns. If you do return 1/3 in each year, then yes, you would negate each year as you go, just as they describe doing for 2022 in the example above.

I understood the pay back at end of 3 years and amend, that is really clear. I was just wondering about the 1/3 claim as income and 1/3 rollover to negate each year. That way someone is not paying on the 1/3 income each of 2 years that they then file amended to recoup. Just never pay at all for each of the 3 years.

 

[Out-to-Lunch]

Just be sure that the distribution qualifies as a coronavirus-related distribution. If I recall correctly there specific rules that apply

The rules seem to be pretty generous.

- You or your spouse test Positive
- You or your spouse lose a job

and with the additional changes:

- You or your spouse have reduced work hours due to Covid

In my case, my wife was reduced first by about 75%, and now by "only" 40%

Agreed, they seem QUITE generous to me:

A3. You are a qualified individual if –

You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

 

[pb4uski]

We wouldn't qualify. Neither would DD/DSIL or DS.... in no case have their hours been reduced nor have they tested positive. Nor any of my nieces or nephews. Lucky I guess.

 

[Out-to-Lunch]

I understood the pay back at end of 3 years and amend, that is really clear. I was just wondering about the 1/3 claim as income and 1/3 rollover to negate each year. That way someone is not paying on the 1/3 income each of 2 years that they then file amended to recoup. Just never pay at all for each of the 3 years.

Yes, it appears that you can do as you suggest you wish to do.

Look at IRS Notice 2020-50.

Here is what the guidance says:

Example 1. Taxpayer D receives $75,000 from a section 401(k) plan on December 1, 2020. Taxpayer D is a qualified individual and treats the $75,000 distribution as a coronavirus-related distribution. Taxpayer D uses the 3-year ratable income inclusion method for the distribution. Taxpayer D makes one recontribution of $25,000 to the section 401(k) plan on April 10, 2022. Taxpayer D files the 2021 federal income tax return on April 15, 2022. Without the recontribution, Taxpayer D should include $25,000 in income with respect to the coronavirus-related distribution on each of D’s 2020, 2021, and 2022 federal income tax returns. However, as a result of the recontribution to the section 401(k) plan, Taxpayer D should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $25,000 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.


Example 2. The facts are the same as in Example 1 of this section 4.E, except that Taxpayer D recontributes $25,000 to the section 401(k) plan on August 10, 2022. Taxpayer D files the 2021 federal income tax return on April 15, 2022, and does not request an extension of time to file that federal income tax return. As a result of the recontribution to the section 401(k) plan, Taxpayer D should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $25,000 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $0 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

 

[SecondCor521]

OK, maybe I'm a little dense here, but it's not at all clear to me that anyone has addressed what I think OP is talking about doing. That is, the responses have not been 100% on point. That, or I'm dense, which is a distinct possibility.

All the tax guidance quoted is talking about repaying or recontributing back to the 401(k). Yes, I see where cathy63's IRS quote indicates that the repayment would be treated as a trustee-to-trustee transfer, but that doesn't mean the same thing as them treating a rollover as a repayment. I read that part of cathy63's IRS quote to simply mean that a repayment undoes the taxes on the coronavirus distribution.

OP is talking about a rollover into the 401(k) (presumably from a rollover IRA). I see nothing in any of the tax guidance quoted thus far to say that such a rollover would be treated as a repayment of a coronavirus distribution.

Maybe it is, maybe it isn't, but the two things seem different enough to me that I wouldn't think the IRS would allow such a thing. They're usually pretty good about catching ideas like this and not allowing them.

 

[Out-to-Lunch]

OK, maybe I'm a little dense here, but it's not at all clear to me that anyone has addressed what I think OP is talking about doing. That is, the responses have not been 100% on point. That, or I'm dense, which is a distinct possibility.

All the tax guidance quoted is talking about repaying or recontributing back to the 401(k). Yes, I see where cathy63's IRS quote indicates that the repayment would be treated as a trustee-to-trustee transfer, but that doesn't mean the same thing as them treating a rollover as a repayment. I read that part of cathy63's IRS quote to simply mean that a repayment undoes the taxes on the coronavirus distribution.

OP is talking about a rollover into the 401(k) (presumably from a rollover IRA). I see nothing in any of the tax guidance quoted thus far to say that such a rollover would be treated as a repayment of a coronavirus distribution.

Maybe it is, maybe it isn't, but the two things seem different enough to me that I wouldn't think the IRS would allow such a thing. They're usually pretty good about catching ideas like this and not allowing them.

I wasn't able to follow what you meant exactly, but I think you have it a bit muddled.

You can take a distribution from a pre-tax account. If you later repay it (from, say, your checking account) to another pre-tax account, the IRS will treat this as if the whole thing was a trustee-to-trustee transfer (frequently called a "rollover"), and will deem that tax was not due (or is no longer due) on the original distribution.

In his point #3 in the OP, he said "rollover," but he didn't mean taking an ADDITIONAL distribution. He just meant writing a check from cash on hand, which the IRS will deem to constitute a "rollover" of the original distribution.

 

[SecondCor521]

I wasn't able to follow what you meant exactly, but I think you have it a bit muddled.

You can take a distribution from a pre-tax account. If you later repay it (from, say, your checking account) to another pre-tax account, the IRS will treat this as if the whole thing was a trustee-to-trustee transfer (frequently called a "rollover"), and will deem that tax was not due (or is no longer due) on the original distribution.

In his point #3 in the OP, he said "rollover," but he didn't mean taking an ADDITIONAL distribution. He just meant writing a check from cash on hand, which the IRS will deem to constitute a "rollover" of the original distribution.

I'm not muddled. I understand exactly what you're saying about the CARES Act.

I take people to mean what they say, so when OP says "rollover" in the OP, I assume they are using the term correctly and meaning a rollover. Since the only way I know of to do an actual rollover into a 401(k) is from a rollover IRA, that's what I inferred they meant.

If the OP wrote "rollover" but meant a repayment, then the OP is being unclear and inaccurate in their language. But if this is the case, then I generally agree with you and the others.

It would be nice if the OP were to clarify what they meant.

 

[pb4uski]

OK, maybe I'm a little dense here, but it's not at all clear to me that anyone has addressed what I think OP is talking about doing. That is, the responses have not been 100% on point. That, or I'm dense, which is a distinct possibility. ...

Maybe I'm the one that's dense... it seems to be 100% on point to me.

OP is talking about taking a $100k distribution because he qualifies and electing to recognize the income over 3 years and then paying it back in the nick of time each year to avoid being taxed on the income because the repayment is treated as a trustee-to-trustee rollover and the repayment negates the income recognized. So the OP gets to play with the money from when it is withdrawn until when it is paid back without any tax consequences.

 

[Out-to-Lunch]

I'm not muddled. I understand exactly what you're saying about the CARES Act.

I take people to mean what they say, so when OP says "rollover" in the OP, I assume they are using the term correctly and meaning a rollover. Since the only way I know of to do an actual rollover into a 401(k) is from a rollover IRA, that's what I inferred they meant.

If the OP wrote "rollover" but meant a repayment, then the OP is being unclear and inaccurate in their language. But if this is the case, then I generally agree with you and the others.

It would be nice if the OP were to clarify what they meant.

I am sorry I used the word "muddled." I was in a hurry, and didn't review my post. I apologize.

I agree that one should, in general, assume, that people mean what they say. But please read his point #3 again (with emphasis added by me):

If your situation changes and income comes back to allow for return of funds, could you: Claim $33.3k of income on 2020 tax return, but negate this with $33.3k of rollover (prior to April 2021) to be adjusted out of your 2020 income?

Given the tenor of the rest of the question, I think it is reasonable to infer that his use of "rollover" means to effectively create a rollover by re-contributing the funds previously withdrawn. After all, we agree that we take him at his word that this was because his situation changed, and that funds that were not previously available to him become available.

I agree that it would be nice if the OP clarified.

 

[pb4uski]

Yeah, unless the OP had a legitimate liquidity problem that the IRA could solve, I don't get the play.

 

[SecondCor521]

@Out-to-Lunch, no worries! I see what you're saying about why the OP might be using the word "rollover" colloquially. It's something I usually don't do, but I can see why others might.

@pb4uski, I'm also not sure of the play. I think sometimes people see a new tax bauble and decide that they want to take advantage of it, even if doing so doesn't really create much actual benefit for them. This may - or may not - be the case with OP.

Re-reading the OP, I think they might be focusing on the fact that they can get an interest-free penalty-free "loan" from their 401(k) and may plan on investing it during the 1/2/3 years it's "outside" and profiting off of that somehow. This ignores or glosses over the fact that leaving it in the 401(k) is also interest-free, penalty-free, and invested in something. It also ignores or glosses over the loss of tax-deferred compounding that otherwise would happen if it were left in there.

 

[Tiger8693]

Sorry for all of the confusion from the term "rollover". I indeed meant recontribution or payback, from which the 401k funds would be taken, to a "rollover" IRA where funds would be "recontributed", along the timeline identified in the OP.

Also, no, this is not to "play" with the money until the last minute each year. In fact, my hope would be to recontribute fairly quickly (following the sale of primary home). This just gets me a portion of the equity after sale of current home to allow start of new home prior to that sale.

Yes, before people start chastising, this is somewhat taking advantage of the CARES Act. Much like taking advantage of all other tax situations given through legislation for any other personal tax benefit.

 

[Tiger8693]

We wouldn't qualify. Neither would DD/DSIL or DS.... in no case have their hours been reduced nor have they tested positive. Nor any of my nieces or nephews. Lucky I guess.

Yes, very lucky I would say, with the impact of the shutdown of the US economy impacting tens of millions of people.

 

[pb4uski]

Sorry for all of the confusion from the term "rollover". I indeed meant recontribution or payback, from which the 401k funds would be taken, to a "rollover" IRA where funds would be "recontributed", along the timeline identified in the OP.

Also, no, this is not to "play" with the money until the last minute each year. In fact, my hope would be to recontribute fairly quickly (following the sale of primary home). This just gets me a portion of the equity after sale of current home to allow start of new home prior to that sale.

Yes, before people start chastising, this is somewhat taking advantage of the CARES Act. Much like taking advantage of all other tax situations given through legislation for any other personal tax benefit.

Ok, I get the play now... just a liquidity play to start the new house before the current house sells... sounds smart to me.

No probably with taking advantage of a loophole IMO.

 

[Tiger8693]

Ok, I get the play now... just a liquidity play to start the new house before the current house sells... sounds smart to me.

No probably with taking advantage of a loophole IMO.

Thanks. I am hoping it may be a smart play. Lumber skyrocketed last month, so was delaying and hoping for a decrease, but now the hurricane....

 

[Tiger8693]

Yes, it appears that you can do as you suggest you wish to do.

Look at IRS Notice 2020-50.

Here is what the guidance says:

Thanks for the link. Great information! I may still try to find a tax CPA or attorney that may confirm, but that seems pretty clear to me.

 

[Out-to-Lunch]

Thanks for the link. Great information! I may still try to find a tax CPA or attorney that may confirm, but that seems pretty clear to me.

Glad to help!

 

[jazz4cash]

Flexible Spending Accounts

We put some extra funds into FSAs this year in anticipation of some elective dental work. Between mandated and self-imposed delays due to pandemic we may be unable to use these funds. Is there any relief in the COVID 19 legislation for this scenario? I’m pretty sure we have to use these by 1Q21 otherwise.

 

[Alan]

Threads merged.

 

[SecondCor521]

We put some extra funds into FSAs this year in anticipation of some elective dental work. Between mandated and self-imposed delays due to pandemic we may be unable to use these funds. Is there any relief in the COVID 19 legislation for this scenario? I’m pretty sure we have to use these by 1Q21 otherwise.

If your employer agrees to do so, your deadline may be extended to the end of 2021. See item #20 here:

https://www.kiplinger.com/slideshow...anges-and-key-tax-amounts-for-2020/index.html