The CARES Act allows for coronavirus-related distributions from retirement accounts between Jan. 1, 2020 and Dec. 31, 2020, provided the distributed amounts were no more than $100,000 or 100% of your vested account balance. The Act essentially waives the 10 percent early withdrawal penalty. Furthermore, the Act allowed for these distributions to be repaid at any time over three years to avoid income taxes on the distribution. The IRS recently posted a questions and answers section on their website that provides some clarification on how the IRS is handling tax issues related to the CARES Act; however, “official guidance” has not been released.

As is stands right now, it appears the IRS is taking a limited-scope interpretation of this provision of the law. For a distribution of up to $100,000 to qualify as a coronavirus-related distribution, one of the following must apply:

♦ You, your spouse, or dependent is diagnosed with the COVID-19 by a CDC-approved test.

♦ You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off, or by having reduced work hours.

♦ You experience adverse financial consequences as a result of being unable to work due to lack of childcare because of COVID-19.

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

Based on the wording, I believe adverse financial consequences that are a result of other factors, although related to the coronavirus (i.e. stock market downturn, economic contraction, lack of liquidity, etc.), are not currently being considered as qualifications for a coronavirus-related distribution. Unless you fall within one of the categories listed, I suggest waiting to take coronavirus-related distributions until further guidance is provided or qualifying factors are extended.

Per the IRS, “Taxes on coronavirus related distributions are paid ratably over a three-year period, starting with the year in which you receive your distribution.” The account custodians that I work with have indicated they are not reporting distributions any differently on your 1099-R. Currently, it is up to you and your tax preparer to designate distributions as coronavirus related. You will use Form 8915-E (which is expected to be available by the end of the year) to report repayment of coronavirus-related distributions and to determine the amount of income to include from these distributions.

The recent IRS posting indicates the repayment window begins the date the distribution is received. I assume this means the tax year the distribution is received, so if you received the funds from a coronavirus-related distribution on June 1, 2020, you would have to pay it back by Dec. 31, 2022. Since you are paying the tax ratably over the period you held the funds out, if you waited until 2022 to pay the money back, you would have to file amended returns for 2020 and 2021 to receive refunds for the taxes paid on distributions during each of those years. Your 2022 return wouldn’t be filed until 2023, so you would not report the income from the distribution in that year.

While this helps clear up many questions, there is still some grey area out there. I suggest speaking with your CPA or tax adviser for further guidance. I will keep you updated and informed as I know more.

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William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.


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