1099-R with 1M in Box 7- CARES Act

[Phil81]

My son lost his job in 2020 due to Covid reasons. He received two 1099-Rs when he rolled over his company's 401K to an qualified IRA.  The first 1099-R had the code G, This is no problem.  The second 1099-R was for an outstanding loan amount he had in place against the 401K.  When he was laid off, he chose to not repay the loan, thus that's why he got the second 1099-R with the code 1M in Box 7.  The actual loan was taken prior to 2020 and he was making regular repayments. Is he allowed to utilize the CARES Act to avoid the 10% early withdrawal penalty?

[ColeenD3]

Maybe.

Section 2202 of the CARES Act also increases the allowable plan loan amount
under § 72(p) of the Code and permits a suspension of payments for plan loans
outstanding on or after March 27, 2020, that are made to qualified individuals.

Those who qualify as individuals directly impacted by the pandemic will be able to withdraw up to $100k from their retirement accounts without facing the 10% early withdrawal penalty.

You qualify if:

• You, your spouse, or your dependent are diagnosed with COVID-19
• You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
• You had work hours reduced to COVID-19
• You’re unable to work due to child care closure or hour reduction

The distribution would be taxed over 2020, 2021, and 2022. You’ll have that time to pay back the funds you withdrew, without the amount impacting that year’s cap on contributions, and if you pay back the amount within that time, you’ll be able to claim a refund on those taxes.

[tnthompson04]

My dad is in this same situation, but I don't really feel like that is a clear answer that was given. For the CARES act, he did test positive for COVID 19 and he was laid off due to COVID 19. He had a loan against his 401k from the year before, but when he was laid off he rolled that 401k into a traditional IRA. The loan was being paid from his paycheck, so when he rolled it over to the IRA I'm assuming they just took that money and used for the loan (not totally sure there, still investigating), but that loan total amount he got the separate 1099-R form showing fully taxable. Regardless, he meets 2 pieces of criteria for the CARES act and this penalty on the loan was directly tied to his COVID job loss, but the loan was taken the year before. Does he still qualify?

[AmyC]

Yes.  The loan was not a problem in 2019. It was COVID that created the loan becoming a distribution. Were it not for COVID, he would have continued working and paying back the loan.

See Congress.gov. “Coronavirus Aid, Relief, and Economic Security Act (CARES Act).” Sec 2202. 

Several articles mention the number of people with loans on a normal basis. The IRS expected some people would lose their jobs. When you do, oftentimes, the company forces the retirement money on you and the full loan is due. Not his fault, COVID related.

See also IRS.gov. “Disaster Relief Bill Includes Retirement Plan Distribution and Loan Options.”

@tnthompson04

[tnthompson04]

One more question- the loan was closed out in 2020 due to being laid off from COVID, however, that was not the time that the original loan was taken. Is this question here asking was the original loan taken in 2020, or was it when it had to be closed out due to lay off in 2020?  If I answer no, then it says not eligible for CARES act in Turbo Tax prompt. 

"First, did you receive the money from your early withdrawal in 2020 on or before December 30, 2020" 

He was laid off in Spring of 2020, so that is when the loan was closed out due to lay off, but the original loan was prior to 2020. Do I answer yes or no that question? Not sure exactly what it means based on your other statement.

[DanielV01]

If the question is reading December 30, 2020 (not 2019), then you will answer yes to that question, because you did receive the funds before December 30, 2020.  However, if the question is whether you received the funds before December 30, 2019, then the answer is no.  Since the funds are not taxable until the loan is cancelled, the distribution is not constructively received until that point (because you were still responsible for returning the funds prior to that point).  

And when you are asked when you first started receiving distributions, this will also be springtime of 2020, for the same reason.  This should qualify the funds to have the early distribution penalty waived.  And then he may have the election to distribute the income over a three-year period.

[tnthompson04]

The Turbo Tax question reads "....In 2020 on or before December 30, 2020",  which I'm reading as in 2020 by 12/30/20. If the loan distribution date in Spring 2020 is what this withdrawal is talking about I would say yes, but if it means when was the loan originally taken, it would be no. If it is when the original loan was taken and the answer is no, it sounds like this should still qualify for the CARES act, but Turbo Tax essentially shuts down that option by the response of no.

[AmyC]

The answer is yes, you took the distribution in 2020. You qualify for the 3 year CARES act spread.