CARES ACT: Qualified Distributions

[Al Beatty]

I understand the CARES Act allows taxpayers to not be subject to the early 10% distribution penalty as well as electing to spread out the income over three years from qualified distributions of up to $100,000 in 2020 if they meet the criteria. What I don't understand is I thought the mandatory 20% withholding of taxes still applied. Was that optional or waived by the taxpayer when they requested the distribution? I have had three of these and they been all across the board. One had 15% tax withheld, one 10%, and one even zero taxes withheld!

Has anyone else seen this? Was that part of the CARES Act where withholding was reduced or totally optional?

[TaxGuyBill]

Yes, it is in the CARES Act (the same Section 2202 that shows the treatment of qualified distributions).

A slightly easier to read version is Notice 2020-50:

If a distribution is treated as a coronavirus-related distribution by an employer retirement plan, the rules for eligible rollover distributions under §§ 401(a)(31), 402(f), and 3405 are not applicable to the distribution. Thus, the plan is not required to offer the qualified individual a direct rollover with respect to the distribution. In addition, the plan administrator is not required to provide a § 402(f) notice. Finally, the plan administrator or payor of the coronavirus-related distribution is not required to withhold an amount equal to 20% of the distribution, as is usually required under § 3405(c)(1). However, a coronavirus-related distribution is subject to the voluntary withholding requirements of § 3405(b) and § 35.3405-1T.

https://www.irs.gov/pub/irs-drop/n-20-50.pdf

[Al Beatty]

Thanks Tax Guy Bill!

[Rapid Robert]

the plan administrator or payor of the coronavirus-related distribution is not required to withhold an amount equal to 20% of the distribution, as is usually required under § 3405(c)(1). However, a coronavirus-related distribution is subject to the voluntary withholding requirements of § 3405(b) and § 35.3405-1T.[/I]

I went and read most of that code section, not even sure they are talking about IRAs or just employer plans, and also don't understand why a ROLLOVER distribution would have mandatory withholding.

What I don't understand is I thought the mandatory 20% withholding of taxes still applied. Was that optional or waived by the taxpayer when they requested the distribution?

My own experience is that with IRAs at least, you can easily request no withholding, but there is a default Inot mandatory) level of maybe 20%. That has been true since long before the CARES Act.

[Rapid Robert]

Here is from the instructions for Form 1099-R regarding IRA withholding.

IRAs. The 20% withholding does not apply to
distributions from any IRA, but withholding does apply to
IRAs under the rules for periodic payments and
nonperiodic distributions. For withholding, assume that
the entire amount of a distribution from an IRA other than
a Roth IRA is taxable (except for the distribution of
contributions under section 408(d)(4), in which only the
earnings are taxable, and section 408(d)(5), as
applicable). Generally, Roth IRA distributions are not
subject to withholding except on the earnings portion of
excess contributions distributed under section 408(d)(4).

An IRA recharacterization is not subject to income tax
withholding.

[New York Enrolled Agent]

I went and read most of that code section, not even sure they are talking about IRAs or just employer plans, and also don't understand why a ROLLOVER distribution would have mandatory withholding.

Remember - a fund administrator doesn't know if, in fact, the taxpayer will actually complete a rollover. They simply cut a check.

There is no withholding on a trustee-to-trustee rollover because the taxpayer never has control §3405(c)(2).

Note in §3405(c)(1) the code uses " ... a distribution which is an eligible rollover...." and then withholds the 20%