2021 1099-R covid-19 distribution due to furloughed in 2021

[llbrewer]

I received a 2021 1099-R for a 2020 Covid-19 loan distribution due to being furloughed in 2021 and loan payments stop in 2021.   It doesn't appear that Forms 8915-E or 8915-F apply.  All of the information about the Cares Act is that it expired in December, 2020.  How do I report? 

Thank You,

Larry

[MinhT1]

You will have to report the form 1099-R as a distribution which is taxable in 2021.

[llbrewer]

But, this is a 2020 QUALIFIED Covid-19 distribution to a QUALIFIED individual under the Cares Act that was classified as a deemed distribution in 2021 because of being furloughed in 2021.  Could you please elaborate or provide the source for your reply.

Thanks 

[DaveF1006]

To clarify, are you certain that this is not a separate loan distribution made in 2021?

@llbrewer 

[llbrewer]

Yes, absolutely, this is from the original 2020 retirement plan loan.  There is only one loan and that was in 2020.

There was no default distribution until 2021 because the loan payments stopped after the furlough in 2021.  I assume this could happen to a lot of employees.  Take out a retirement plan loan in 2020 and then get furloughed or laid-off in 2021 and the loan repayment withholding's stop.

[dmertz]

If the loan repayments stopped when you separated from service, I would expect that this distribution would be an offset distribution.  If so, this would be indicated by the inclusion of code M in box 7 of the Form 1099-R.  Code M means that you have until the due date of your 2021 tax return, including extensions, to come up with the funds to roll the money over to another qualified retirement account such as an IRA, allowing you to continue to defer this income and avoid any potential early-distribution penalty.

This does not qualify as a Coronavirus-Related Distribution because the deadline for obtaining a CRD was December 30, 2020.  (This distribution occurred after that deadline; the loan itself was not a distribution.)

[llbrewer]

Thank you for the detail reply.  Box 7 was marked "1L" for Deemed distribution.  This loan was taken out in January, 2020 and was not initially taken out for Coronavirus reasons.  This may be the reason the 1099-R code designation is L.  However, my understanding from the IRS Notice 2020-50 is the original intent of the loan does not affect the status as a Coronavirus exception.

I also understand from the Notice that the individual can treat the distribution as Coronavirus related even if the 1099-R does not reflect that as long as it is a qualified distribution to a qualified individual.  The distribution was not rolled over because I was called back to work in April, 2021 and my 401K is still active.

Thank you for correcting my definition as a Loan and not a Distribution in 2020.  This all relates to a loan taken out in 2020 that can be characterized as Coronavirus related and was treated as a distribution because of being furloughed.  I know it will be taxed, but I would like to have the 3 years to include the distribution for taxes. 

Thank you

[dmertz · Accepted solution]

So it seems that you were not considered separated from service and your loan became a deemed distribution.  This means that the loan has not been satisfied and you are still obligated to make payments on the loan.  However, payments that you make become after-tax basis in the 401(k), so you won't pay taxes again on this money.

Because the distribution event (the deemed distribution) occurred after December 30, 2020 as evidenced by it being reported on a 2021 Form 1099-R, it's not a Coronavirus-Related Distribution that would be eligible for splitting the income in equal parts over three years.  It could only be a CRD if reported on a 2020 Form 1099-R.  You owe income tax and a 10% early distribution penalty on the entire amount on your 2021 tax return.

[llbrewer]

One last question.  Are you familiar with the Consolidated Appropriations Act of 2021 (CAA) signed into law in December, 2020?  It temporarily replaced or extended some of the provisions of the CARES Act of March, 2020.

It expanded access to penalty-free Distributions. 

"For purposes of the CAA, a “qualified disaster distribution” is any distribution made from 401(k) plan on or after the first day of the occurrence of a “qualified disaster” prior to June 25, 2021".

Do you know if this can be applied to Coronavirus related distributions?

Thank you for all of your help

Larry

[Cynthiad66]

Based on your description the CAA applies to penalties for early withdrawals not to the Disaster Distributions for 2020.

If you meet the requirement for penalties you might consider applying  for penalty relief.  However, that would be directly with the IRS after filing if there i no option in the prep proces.

@llbrewer