Coronavirus Related Distribution

Ed Zurndorfer explains coronavirus-related distribution income inclusion and repayment options

FEDZONE Ed Zurndorfer


Edward A. Zurndorfer

Although coronavirus-related distributions (CRDs) are no longer available as of Dec. 31, 2020, those employees and annuitants who took CRDs during 2020 now face a decision whether to include their CRDs in taxable income or to repay their CRDs. This column discusses the various options available to CRD recipients for including the CRDs in income or repaying CRDs.

On June 19, 2020, the IRS issued Notice 2020-50 which provided guidance on repaying CRDs. It is important that employees and annuitants who took CRDs to understand the various and somewhat complex options available for income inclusion and CRD repayment options.

Option 1: Including CRDs in Taxable Incomes

Since pre-taxed CRDs are subject to federal and state income taxes, the CARES Act eased the tax consequences by allowing CRD taxable income to be spread equally over 2020, 2021 and 2022.

In fact, the three-year CRD income spread is default. A CRD recipient will automatically spread equally the CRD income over the years 2020, 2021 and 2022. There is only one other option available and that is CRD recipient can choose to include the entire amount of the CRD in 2020 income. This election to include the entire amount in 2020 income must be made on IRS Form 8915-E by the filing date of the 2020 income tax return (April 15, 2021 or October 15, 2021 if a filing extension is requested). Once made, this election cannot be changed.

The question becomes: Why would an individual want to include the entire CRD in his or her 2020 income tax return? One possible reason is that many individuals who received CRDs during 2020 had significantly less income during 2020. However, these individuals expect to return to their normal income level during 2021 and 2022. In the meantime, although federal income tax rates were historically low in 2020, tax rates for 2021 and 2022 are uncertain.

Requesting a six-month extension for filing the 2020 income tax return may be useful and probably recommended. In so doing, the CRD recipient will have a better sense of their 2021- and 2022-income prospects. Also, during this six-month period, the chances of any tax law change under the current Congress may become clearer. For individuals expecting a refund on 2020 taxes, the value of filing an extension should be weighted against immediate financial need, as the following example illustrates:

Phyllis, a federal employee, is married to Olivia who lost her airline job during 2020 as a result of the COVID pandemic. Phillip took out a $90,000 TSP CRD. As the April 15, 2021 filing date approaches, Phillip and Olivia are unsure whether to spread the CRD income of $90,000 over three years ($30,000 in 2020, 2021 and 2022) or include the entire $90,000 as 2020 taxable income. They realize that their 2020 taxable income was abnormally low because of Olivia’s unemployment. Olivia is unsure whether she will be rehired by the airlines she works for. The result is that Phillip and Olivia are unsure how their 2021 and 2022 income will compare to their 2020 income. IT is also unclear whether Congress will increase 2021 individual income taxes. Phillip and Olivia do not expect a large 2020 federal income tax refund. Phillip and Olivia are advised to request a six-month extension to file their 2020 income taxes. This will allow them more time to gain a better understanding of their 2021 and 2022 taxable income and whether new legislation will increase their 2021 and 2022 federal income taxes.

Option 2: CRD Repayments

To avoid paying the tax due on their CRDs, qualified individuals who took a CRD can repay the distribution within three years to either a traditional IRA or a qualified retirement plan (such as the TSP) that accepts rollovers. The three-year period begins on the day after the CRD was received and is unaffected by any tax return extensions. Repayments must be reported on IRS Form 8915-E which is filed with one’s federal income tax returns.

The repayment rules differ depending on whether the CRD recipient opts to repay the CRD over three years or elects to include the entire amount in 2020 taxable income.

  • Repayment option 1: One-year inclusion is elected. No matter when full repayment is made within the three-year period, it will reduce 2020 CRD income. The following rules apply:
    • If full repayment is made before filing the 2020 tax returns, then the CRD is not reported as income on the 2020 income tax returns. No amended 2020 tax return is necessary.
    • If repayment is made after filing the 2020 tax return, then the CRD income must be reported on the    2020 tax return, but income taxes paid on the CRD can be recouped by filing an amended federal (state, if applicable) income tax return and not including the CRD.

An individual who took a CRD should perform a careful analysis whether or not to repay the funds from a CRD. A major advantage of repayment is to allow the withdrawn funds to again reap the benefit of tax-deferred (or tax-free) growth until retirement. But some CRD recipients might be better off using funds available for repayment in some other way, such as building up one’s liquid savings or paying off significant credit card debt.

From a tax-standpoint, reducing 2020 income through repayment may be less valuable if income was already diminished because of COVID-19. But repayment may be worthwhile if it reduces one’s taxable income into a lower marginal tax bracket.

  • Repayment option 2: Three-year income spread is used. When spreading CRD income over 2020, 2021 and 2022 and repaying 1/3 of the CRD each year, the following rules apply:
    • A repayment made before the timely filing of a particular year’s tax return (2020, 2021 or 2022) is applied to offset the CRD income that would have been included in that year’s return.
    • A repayment made after the timely filing of a particular year’s tax return (2020, 2021 or 2022) must be applied to offset the next year’s CRD income.

When spreading CRD income over 2020, 2021 and 2022 and repaying more than 1/3 of the CRD during either during 2020 or 2021, the first 1/3 repaid is subject to the previous two rules: For the additional portion of the repayment, the individual has tw0 options: (1) carry forward the excess to the next year, and (2) carry back the excess to a prior year (or years). If the second option is used, an amended tax return (with an amended Form 8915-E) must be filed for each carryback year to reflect the offset of CRD income.

It is important to understand that when using the three-year spread, it is important to determine not only whether repayment makes sense, but also when to repay (which year). And if the repayment amount exceeds 1/3 of the CRD, the payer must also decide which of the two options should be elected for the excess repayment in that year.

These rules are designed to allow individuals to time their CRD repayments in a way that maximizes their tax savings. Here again, it is extremely important for individuals to consider their actual and projected income levels for 2020, 2021, and 2022, as well as the effect of any potential federal income tax increases.


Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Coronavirus Related Distribution

Coronavirus Related Distribution