The Thrift Savings Plan (TSP) recently announced that it has mailed to TSP participants IRS Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) for the year 2020.
In particular, any TSP participant who during 2020 requested a withdrawal from his or her TSP account, or any TSP participant who requested a transfer of their traditional or Roth TSP account to a qualified retirement plan or to an IRA, was issued a 2020 Form 1099-R. Some TSP participants who are receiving these 1099-R statements may not understand either the information on their 1099-R statement or why they are receiving a 1099-R statement in the first place.
Perhaps the main reason why there is a current lack of understanding with respect to the Form 1099-R may be a result of the COVID-19 pandemic.
This column explains why some TSP participants are receiving a Form 1099-R for 2020 as a result of the COVID-19 pandemic. Also, this column will explain how the information provided on the TSP participant’s Form 1099-R will be included on the participant’s 2020 federal income tax return.
In its announcement of the 2020 Form 1099-R distribution, the TSP mentioned that it expects that some TSP participants who recently received a Form 1099-R may request from the TSP Service Office a corrected Form 1099-R statement. In that case, affected TSP participants are advised to wait to file their 2020 Federal and state income returns until they have received their corrected 1099-R from the TSP.
The Coronavirus Aid Relief, and Economic Security (CARES) Act enacted on March 27, 2020 included favorable tax provisions for most types of TSP withdrawals made by TSP participants affected by COVID-19. The information that follows applies to eligible TSP participants who made COVID-19 related TSP withdrawals and required minimum distributions (RMDs) between January 1 and December 30, 2020.
To be eligible for the favorable tax treatment described below, a TSP participant who made a withdrawal from his or her TSP account during 2020 must have been a “qualified individual”. A “qualified individual” meets at least one of the following criteria:
· The individual was diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention.
· The individual’s spouse or a dependent was diagnosed with such virus or disease.
· Due to COVID-19, the individual experienced adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household:
– being quarantined,
– being furloughed or laid off, or having work hours reduced,
– being unable to work due to lack of child-care, or
– having a reduction of pay or self-employment income; or
– having a job offer rescinded or a start date for a job delayed.
Only ‘coronavirus-related distributions” are eligible for the favorable tax treatment provided by the CARES Act. IRS defines a “coronavirus-related distribution” as a distribution that is made from an eligible retirement plan (such as the TSP) to a qualified individual between Jan. 1, 2020 and Dec. 30, 2020, up to an aggregate limit of $100,000 from all retirement plans and IRAs.
A TSP participant who was a qualified individual for a coronavirus-related distribution could have withdrawn a maximum $100,000 across the TSP and traditional IRAs he or she owns. The TSP participant must designate the withdrawal as a “coronavirus-related distribution” when filing their 2020 federal income tax return. To do that, the TSP participant must file IRS Form 8915-E with his or her 2020 federal income tax return.
The tax advantages for qualified individuals who took coronavirus-related distributions include:
· The IRS waives the 10 percent additional federal tax on early (pre age 59.5) distributions.
· The qualified individual who took the coronavirus-related distribution may spread the taxable income ratably over a three-year period, starting with the year in which the distribution was received. For example, if a qualified individual received a $15,000 coronavirus-related distribution in 2020, the qualified individual could report $5,000 of income on his or her federal income tax return for each of 2020, 2021 and 2022. This is optional; the individual can also choose to include all of the income in the year of the withdrawal.
· A TSP participant who is a qualified individual and who received a coronavirus-related distribution during 2020 can repay all or part of the amount of the distribution to the TSP or to a qualified retirement plan such as a 401(k)-retirement plan that the individual previously participated in. If the coronavirus-related distribution is repaid to the qualified retirement plan, the distribution will be treated as though it were repaid in a “direct plan-to-plan transfer”, meaning that the individual will not owe federal income tax on the coronavirus-related distribution. IRS rules allow the qualified individual to repay coronavirus-related distributions to the plan from which it was received (in this case the TSP) or to another eligible retirement plan.
How to Repay a TSP Coronavirus-Related Distribution
To make a repayment of a coronavirus-related distribution received during 2020, a TSP participant who is a qualified individual must complete Form TSP-60 in order to repay into the traditional TSP account. To repay into the Roth TSP account, the individual must complete Form TSP-60-R .
By signing Form TSP-60 or Form TSP-60-R, the TSP participant self-certifies that the TSP participant in fact is a qualified individual and that the withdrawal was a coronavirus-related distribution.
TSP RMD Changes
The CARES Act allowed the TSP to waive 2020 required minimum distributions (RMDs) for all TSP participants who would otherwise have been subject to RMDs. This included participants for whom 2020 would have been their first RMD year even though that distribution would not have been due to be taken until April 1, 2021.
Any TSP participant who took and received his or her 2020 TSP RMD between Jan. 1 and May 15, 2020 was given the option to roll those amounts back to their TSP accounts until Aug. 31, 2020. If done properly and by the due date, the TSP participant’s RMD would not be included as taxable income for the year 2020. The procedure for rolling over those amounts is discussed above under “How to Repay a Coronavirus-related Distribution”. If rolled over successfully, the RMD would be considered as a “rollover” (not taxable) and not as a “distribution” (taxable).
Will the 2020 Form 1099-R Issued by the TSP Tell the Whole Story with Respect to Coronavirus-Related Distributions and RMD Changes?
IRS Form 1099-R is used to show TSP distributions during a calendar year. If any TSP participant took a TSP distribution or made a TSP withdrawal during 2020, the participant should be receiving a Form 1099-R from the TSP by February 1, 2021. A copy of Form 1099-R is also sent to the IRS.
Form 1099-R includes valuable information for the TSP participant to whom it is sent. The TSP participant will need this information to prepare his or her 2020 federal income tax return. For example, the total amount of the TSP distribution that occurred during 2020 will appear in Box 1 of the 1099-R, “Gross Distribution”. In Box 7 there will be a distribution code. While there are many possibilities the two most common are Code 1 which is an “early distribution” and Code 7 which indicates a “normal distribution” (in most cases, fully includable as taxable income on the TSP participant’s 2020 federal income tax return). Another common code is Code G which indicates a “rollover” to a retirement plan or to an IRA.
While the Form 1099-R provides valuable information, it does not paint a full picture for TSP participants, especially with the COVID-19 TSP withdrawals and repayments, and TSP RMD changes discussed above.
For example, if a TSP participant who made a qualified coronavirus-related distribution and has elected to repay the distribution, the 1099-R should have a Code G in Box 7. Another example: a TSP participant, a federal annuitant over the age of 70.5 as of Dec. 31, 2019 and who took his or her 2020 TSP RMD between Jan. 1 and May 15, 2020. The TSP participant rolled over the TSP RMD to his or her TSP account before Aug. 31, 2020. The RMD is therefore not taxable and should also have a Code G in Box 7. If a Code 7 is mistakenly put in Box 7, then that would perhaps mean that the TSP RMD is fully taxable and reportable as such on one’s 2020 federal income tax return.
TSP participants who made COVID-19-related withdrawals and made 2020 TSP RMDs should carefully examine their Form 1099-R to make sure the correct code is in Box 7. If they have additional questions and need guidance on how the Form 1099-R information is used in preparing their 2020 income tax returns, they are highly encouraged to contact a tax advisor professional.