IRS website: “Coronavirus-related relief for retirement plans and IRAs questions and answers” (revised May 4, 2020)
On its website, the IRS has released a series of frequently asked questions (FAQs) regarding changes made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to retirement plan distribution and loan rules.
When do I have to pay taxes on COVID-19-related distributions?
The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $9,000 COVID-19-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.
May I repay a COVID-19-related distribution?
In general, yes, you may repay all or part of the amount of a COVID-19-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 COVID-19-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, e.g., you receive a COVID-19-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.
Is it optional for employers to adopt the distribution and loan rules of section 2202 of the CARES Act?
Yes. An employer is permitted to choose whether, and to what extent, to amend its plan to provide for COVID-19-related distributions and/or loans that satisfy the provisions of section 2202 of the CARES Act. Thus, e.g., an employer may choose to provide for COVID-19-related distributions but choose not to change its plan loan provisions or loan repayment schedules. Even if an employer does not treat a distribution as COVID-19-related, a qualified individual may treat a distribution that meets the requirements to be a COVID-19-related distribution as COVID-19-related on the individual’s federal income tax return. See section 4.A of Notice 2005-92.
References: For IRAs, in general, see FTC 2d/FIN H-12200 et seq.; United States Tax Reporter 4084.