CARES Act eases retirement plan distribution and loan rules for those impacted by COVID-19

Learn about the CARES Act’s allowance of special tax treatment for COVID-related distributions and loans from retirement plans.

July 30, 2020

IRS news release IR-2020-124 and Notice 2020-50 have information to help taxpayers take advantage of CARES Act provisions for enhanced access to retirement plan distributions and loans made because of coronavirus-related circumstances.

Coronavirus-related distributions

A coronavirus-related distribution is any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020 to a qualified individual. Aggregate coronavirus-related distributions can be no more than $100,000.

Eligible retirement plans include:

  • IRAs
  • Defined contribution plans including 401(k)s
  • Annuity plans under 403(a)
  • 403(b)s
  • Governmental deferred compensation 457(b) plans

Qualified individuals.

A qualified individual is an individual who experiences COVID-19 related health or financial issues:

  • Diagnosed with COVID-19 by a CDC-approved test
  • Spouse or dependent diagnosed with COVID-19 by a CDC-approved test
  • Adverse financial conditions:
    • quarantine, furlough or layoff;
    • reduced work hours;
    • unavailability of childcare;
    • closed or reduced hours of a business;
    • reduced pay or self-employment income;
    • job order rescinded or start date delayed
  • Spouse or another member of the household experiences any of these adverse financial conditions

Generally, a qualified individual may designate a distribution as a coronavirus-related distribution without having to match it to a specific need arising from COVID-19 circumstances. For example, the withdrawal doesn’t have to correspond to a furloughed employee’s need for funds.

An individual’s designation of a withdrawal as a coronavirus-related distribution is not necessarily the same as the individual’s employer’s designation. For instance, an employer may designate a withdrawal as a coronavirus-related distribution when the individual has already withdrawn more than $100,000 from other employers’ plans or from IRAs. Or the employer may not yet have adopted coronavirus-related plan amendments.

Some types of distributions may not be designated as coronavirus-related distributions, such as distributions of excess 401(k) contributions.

Special tax treatment for coronavirus-related distributions

A coronavirus-related distribution is not subject to the 10% additional tax on early distributions, regardless of the qualified individual’s age. Tax on the distribution may be paid ratably over three years. Distributions may be recontributed to an eligible retirement plan.

Taxation of distributions.

A qualified individual has two methods of including the taxable portion of a coronavirus-related distribution in income. The default is to include the income ratably over the three-year period starting with the tax year of the distribution.

Alternatively, the individual may elect out of the three-year method and include the entire taxable amount in income in the year of the distribution. This election cannot be made or changed after the timely filing of the individual’s tax return (including extensions) for the year of the distribution.

All coronavirus-related distributions must be treated consistently, i.e. all must be included in income over the three-year period or all must be included in the current year’s income.


At any time during the three-year period beginning on the day after the coronavirus-related distribution a qualified individual may recontribute any portion of the distribution to an eligible retirement plan. A recontribution is not considered a rollover contribution for purposes of the one-rollover-per-year limitation. Taxpayers report recontributions on Form 8915-E.

Notice 2020-50 contains many examples explaining how recontribution scenarios work, depending on timing of the recontribution and whether the taxpayer is using the one-year or three-year income inclusion method. Assume in all following examples that the taxpayer is a qualified individual who has received a coronavirus-related distribution.

Example 1. Brenda receives a $45,000 distribution from her 403(b) on November 1, 2020 and recontributes the entire distribution to her IRA on March 31, 2021.

She reports the recontribution on Form 8915-E filed with her 2020 tax return on April 10, 2021. No portion of the distribution is included in Brenda’s income for 2020.

Example 2. Carlos receives a $15,000 distribution from his 457(b) plan on March 30, 2020. He elects out of the three-year method and includes the entire $15,000 distribution on his timely filed tax return for 2020. On December 31, 2022, Carlos recontributes $15,000 to the 457(b).

He will need to file an amended return for tax year 2020 to reduce gross income by $15,000 and receive a refund on the tax he paid on the amount.

Example 3. Daria receives a $75,000 distribution from her 401(k) on December 1, 2020 and does not elect out of the three-year method. Without any recontributions, she would include $25,000 on each of her tax returns for 2020, 2021, and 2022.  She makes one recontribution of $25,000 to her 401(k) on April 10, 2022 and files her 2021 tax return on April 15, 2022.

As a result of the recontribution, Daria includes $0 on her 2021 tax return and $25,000 on her tax returns for 2020 and 2022.

Example 4. Egbert receives a $90,000 distribution from his IRA on November 15, 2020 and does not elect out of the three-year method. Without any recontributions, he would include $30,000 on each of his tax returns for 2020, 2021, and 2022. He recontributes $40,000 to his IRA on November 10, 2021.

He includes $0 in income on his 2021 tax return. Egbert may include $20,000 ($30,000 - $10,000 excess recontribution) on his 2022 tax return.

Alternatively, Egbert may carry the $10,000 excess contribution back to 2020 and file an amended return for that year to change the taxable amount from $30,000 to $20,000.

Employers and administrators of qualified retirement plans may rely on employees’ certifications that they are qualified individuals for purposes of distributions. Notice 2020-50 includes model language for employee certifications.

Employers may implement CARES Act distribution provisions before amending plans to adopt its provisions. Plans must be amended by the last day of plan years beginning January 1, 2022 (January 1, 2024 for governmental plans).

Reporting Coronavirus-related distributions and recontributions

Report Coronavirus-related distributions made on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. The form is also used for other qualified disaster distributions made to taxpayers impacted by 2020 federally-declared disasters.

Also report on Form 8915-E repayments made before the due date of the 2020 return, including extensions. For instance, Brenda in Example 1 above would report her $45,000 Coronavirus-related distribution and her $45,000 recontribution on Form 8915-E because the repayment was made before the due date for filing her 2020 tax return, including extensions.

  • If Brenda had already filed her 2020 tax return before making the recontribution, she would also need to file an amended return.
  • If she recontributes anything after the due date including extensions of her 2020 tax return, she would report the repayment(s) on her return for tax year 2021 and/or 2022, depending on the number, timing, and size of the repayments.

10% additional tax. A coronavirus-related distribution will be reported on Form 1099-R with Code 1, 2, or 7 in Box 7. Form 5329 is generally not needed to report an exception to the 10% additional tax for Coronavirus-related and other 2020 qualified disaster distributions. However, distributions in excess of the $100,000 limit may be reportable on Form 5329. Use exception code 12 for the portion of a Coronavirus-related or other qualified disaster distribution that is not subject to the additional tax.

Relaxed rules for plan loans

Special rules apply to loans from qualified employer plans to qualified individuals made on or after March 27, 2020 and before September 23, 2020.

  • The aggregate limit of plan loans is increased from $50,000 to $100,000.
  • The limit of aggregate plan loans to 50% of the employee’s vested benefits is increased to 100% of the employee’s vested benefits.
  • The due dates for loan repayments occurring March 27, 2020 through December 31, 2020 are delayed for one year. The delay is disregarded for purposes of the five-year plan loan repayment term. Subsequent repayments are adjusted accordingly to reflect the delay and accrued interest.

The notice provides a safe harbor for qualified employer plans to satisfy CARES Act requirements with respect to plan loans. A plan will meet the safe harbor if a qualified individual’s obligation to repay a plan loan is suspended not earlier than March 27, 2020 and not later than December 31, 2020, loan repayments resume after the end of the suspension period, and the loan term is extended up to one year from the date the loan was originally due to be repaid.

Example. On April 1, 2020 Pauline borrows $20,000 from her 401(k) to be repaid in level monthly installments of $368.33 over five years. She makes three payments on the loan. Her employer then takes action to suspend payments July 1, 2020 through the end of the year. Pauline does not make any further payments on the loan until January 1, 2021, when the loan balance is $19,477.

Remaining payments are re-amortized to $343.27 in order to repay the loan balance by March 31, 2026, which is one year after the loan’s original due date.

Employers and administrators of qualified retirement plans may rely on employees’ certifications that they are qualified individuals for purposes of plan loans.

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