How will the tax payments be recaptured when a distribution is a repaid at a later date?

The following guidance was offered by the IRS in Notice 2020-50 published on June 19:

Amounts taken as a CRD (without adjustment for earnings) may be redeposited to an employer-sponsored retirement plan or an IRA within a three-year period, which begins on the day following the date on which funds are received. Required minimum distribution (RMD) amounts or amounts that are a part of a series of substantially periodic payments (i.e., 72(t) distributions) may not be recontributed as a CRD. Hardship distributions, however, may be recontributed (this differs from their usual treatment). Non-spouse beneficiaries of retirement accounts are not afforded the option to recontribute amounts received.

Employer-sponsored retirement plans are not required to accept recontributions of CRD amounts if the plan doesn’t otherwise accept rollovers, which is unusual. Form 8915-E filed for the original disbursement is used to report the recontributed amounts in subsequent years for tax reporting purposes.

Notably, amounts recontributed prior to the tax return due date, including extensions, for a given year may be reflected on that year’s tax return. This redeposited amount may reduce the taxable income for the year of filing.

For tax reporting related to recontributed amounts, the IRS also provided a roadmap via a series of examples:

Tax-Inclusion Method	Amount Recontributed	Reporting
One-year inclusion	Before the due date of the 2020 tax return, including extensions	CRD is included in 2020 income, but total repayment is shown on Form 8915-E. No taxable income is recognized, to the extent distribution amount doesn’t exceed the $100,000 limit.
One-year inclusion	In a subsequent year	CRD is included in 2020 income. When recontributed, 2020 Tax return is amended with Form 8915-E showing amount recontributed; income is adjusted for 2020.
Three-year inclusion	Entirely or in part before the due date of the 2020 tax return	One third of the CRD is included in 2020 income; if repayment reported on Form 8915-E is equal or greater to amount of the CRD included in 2020 income, no taxable income will be recognized in 2020. Any excess over the amount included in income in 2020 is to be applied to offset income in 2021 and 2022, depending on total amount recontributed.
Three-year inclusion	In a subsequent year	One third of the CRD is included in 2020-2022 income; repayment occurs in a later year, for instance 2021, with Form 8915-E reporting the recontribution for that year. Recontribution first offsets any CRD-related income reported in 2021. Any remaining amount may be applied retroactively or prospectively (i.e. amend the 2020 tax return to reduce CRD-related income to the extent allowed by the excess or carry over the excess to the 2022 tax return where the remaining CRD is reported).

Further, the IRS stated that recontributed amounts do not count as rollovers for purposes of one-per-year rule otherwise applicable to IRA accounts.

New Form 8915-E is under development for this purpose as communicated by the IRS on May 4, in Coronavirus-related relief for retirement plans and IRAs questions and answers ‘A coronavirus-related distribution should be reported on your individual federal income tax return for 2020. You must include the taxable portion of the distribution in income ratably over the 3-year period – 2020, 2021, and 2022 – unless you elect to include the entire amount in income in 2020. Whether or not you are required to file a federal income tax return, you would use Form 8915-E (which is expected to be available before the end of 2020) to report any repayment of a coronavirus-related distribution and to determine the amount of any coronavirus-related distribution includible in income for a year. See generally section 4 of Notice 2005-92.”

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Cetera Retirement Plan Specialists is a third-party administrator and may not offer tax, legal or investment advice. Plan sponsors should consult their own tax, legal or investment professionals.