A coronavirus relief provision allowing early distributions from retirement plans offers upfront relief now, but it could be a pain to administer in the years to come.
The Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) includes a provision allowing taxpayers to take out up to $100,000 in early coronavirus-related distributions (CRD) from their retirement plan, and gives them three years from the date of the withdrawal to repay those distributions without triggering tax consequences.
In some cases, that provision has provided taxpayers with a “golden opportunity” to endure the pandemic, according to CPA Mary Kay Foss, who spoke November 18 at a virtual meeting of the American Institute of CPAs Tax Division.
Foss described a client who operated a successful business out of her home, which left her with a significant tax bill for the 2019 tax year. After the pandemic struck, she couldn’t operate her business anymore because of the quarantine rules, but she was able to take a CRD from her retirement plan to pay her 2019 taxes. Foss added that she expects the client to be able to pay it back into her plan before long.
Stephen B. Tackney, deputy associate chief counsel (employee benefits), IRS Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes), described the CARES Act’s early distributions with repayment as a “new but popular concept” of relief that first emerged with hurricane disaster relief legislation. Many taxpayers find it helpful, for example, to be able to temporarily draw out funds from a retirement plan while they’re waiting for their homeowners insurance to pay out, and after they get their insurance payments, they want to be able to put the money back in the plan, he explained.
From a regulatory perspective, however, it’s been a challenge for the IRS to make the repayment aspect administrable for both plans and participants, particularly if there are multiple years for a distribution to be repaid to a plan, as with CRDs, Tackney said.
The CARES Act provision allows taxpayers to take CRDs through December 31, and Foss noted that with COVID-19 cases on the rise and Congress likely to remain deadlocked on a second coronavirus relief package, people may begin to run out of money and increasingly seek to use this option for relief. That will keep many practitioners busy with planning for the next several weeks, she said.
The administrative challenges, however, won’t really hit until tax advisers start to work on returns next year, Foss told Tax Notes. As with other retirement plan distributions, taxpayers will get a Form 1099-R, but they’ll also have to fill out a new Form 8915-E to explain how much, if any, they will pay tax on over three years and how much they will pay tax on now, she said. But since the current Form 1099-R came out before the CARES Act was even contemplated, “I think it’s going to be very confusing, instructionswise,” she added.
Rules and Rulings
As the IRS drafts proposed regulations under section 401(a)(9), it’s looking not just to implement the legislative changes that came with the Setting Every Community Up for Retirement Enhancement (SECURE) Act (P.L. 116-94), but also to obviate the need to issue so many letter rulings, according to Tackney.
The IRS has historically received many letter ruling requests on various fact patterns involving trusts and inherited and spousal IRAs. In its upcoming guidance in that area, the agency is considering ways to simplify those rules and make them more predictable, so that there are fewer fact patterns on which taxpayers need to get the IRS’s opinion, Tackney said.
“I’ve discovered that when people do not die in the correct order, we get the ruling request,” Tackney quipped.
Tackney said the guidance will help taxpayers, but added, “To be honest, it would be useful to us and our resources, because those are pretty fact-intensive rulings.” He asked that once the proposed regs are issued, tax practitioners review the regs and offer feedback on whether the rules are indeed more predictable.
Foss noted that section 401(a)(9) affects “pretty much everything that comes out of a qualified plan or IRA,” and that, particularly with the SECURE Act changes from 2019, “they’ll have to revise almost everything, or at least many parts" of the regulations.
Right now, taxpayers and their advisers are driven to file letter ruling requests because the consequences of making a mistake are “so dire, that I think almost everyone is going in for a ruling request,” Foss said.
If the IRS cleans up its guidance on that section in addition to providing SECURE Act guidance, it’ll end up being a major revision, Foss said. “I work in this area all the time, and we need revisions,” she added.
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