Hello,
The custodian my firm works with is coding all distributions due to Covid as “age based” distributions. However I have a client with a 401K at another custodian were they are coding distributions due to Covid as code 2 in box 7 and stating the reason is due to the pandemic. I know tax reporting is up to the custodian but have you heard of firms using tax code 2 for distributions due to Covid?
Any help would be greatly appreciated.
Thank you.
Notice 2020-50 allows the plan to report CRDs using Code 2, but clarifies that plans can use 1 or 7 as well. The 1099R distribution codes were not changed to reflect CRDs and neither were the 5329 exception codes. The problem with Code 2 is if the participant fails to file 8915 E as required for CRDs, they might still escape the penalty due to the 2 code on the 1099R. If a participant receives early dist code 1 in Box 7, the 5329 instructions indicate the dump code 12 should be shown as the penalty exception for CRDs, but if the 8915 E is properly filed, I doubt whether the lack of a 5329 will cause a problem.
Permalink Submitted by David Mertz on Thu, 2021-02-11 17:33
IRS Notice 2020-50 permits payers to use code 2 for coronavirus-related distributions. To be able to make such a distribution at all to someone under age 59½ and still employed with the employer providing the plan, a 401(k) administrator would likely have to have been given some assurance that the distribution actually qualifies to be as a CRD, such as being shown a positive result of a COVID-19 test, so it’s not unreasonable that they would choose to report with code 2.