Planning Matters (Spring 2020) – Special Coronavirus Relief for Retirement Plans and IRAs

Planning Matters (Spring 2020) – Special Coronavirus Relief for Retirement Plans and IRAs

May 29, 2020

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On the heels of the SECURE Act that was passed at the end of 2019, the CARES Act of 2020 has provided expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans. In addition to special rollover rules that will apply to those distributions, the Act increases the limits on the amount a qualified individual may borrow from an eligible retirement plan (not an IRA) and changes the loan repayment terms. It also eliminates required minimum distributions from most retirement plans.

Key Questions & Answers

Q Who qualifies for the CARES Act provisions pertaining to retirement plans (as outlined in Section 2202)?
A You are a qualified individual if:

  • You are 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;
  • Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having your work hours reduced due to SARS-CoV-2 or COVID-19;
  • You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
  • You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

The IRS has gone on record to say it may issue additional guidance that explains and expands the list of factors that will be taken into account to determine whether an individual is qualified as a result of experiencing adverse financial consequences. “Adverse financial consequences†is not a term of precision and will need additional clarification.

In the meantime, the IRS points to notice 2005–92, which was issued on November 30, 2005. That notice provided guidance on the tax favored treatment of distributions and plan loans that were linked to the Katrina Emergency Tax Relief Act of 2005. The IRS has stated that where current circumstances are similar to those in 2005, the 2005 notice can be used for guidance.

Q What is a coronavirus-related distribution?
A This is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020 to December 30, 2020. The amount of the distribution is capped at $100,000 for qualified retirement plans and IRAs.
Q Is there a 10% penalty for taking a coronavirus-related distribution from my retirement plan or IRA if I am younger than 59½?
A No, the 10% additional tax on early distributions does not apply to any coronavirus-related distributions. Additionally, the mandatory 20% withholding rules do not apply for such distributions.
Q When are the taxes due on a coronavirus-related distribution from a retirement plan?
A The distributions are generally included in your income over a three-year period, starting with the year in which you receive your distribution. For example, if you took a $30,000 coronavirus-related distribution in 2020, you would report $10,000 in income on your federal income tax return for each of the following years: 2020, 2021, and 2022. You will still have the option of including the entire distribution in your income in the year it was distributed.
Q Can a coronavirus-related distribution be repaid to the retirement plan?
A There are two relief provisions that deal with loans from retirement plans. However, understand that retirement plans are not required to have loan provisions. If a retirement plan does not have loan provisions, the CARES Act cannot force loans to be made.

  1. If a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020 to December 31, 2020, that due date may be delayed under the plan for up to one year. Any payments after the suspension will be adjusted to reflect the delay and any interest accruing during the delay.
  2. The CARES Act also permits employers to increase the maximum loan amount available to qualified individuals. Loans used to be restricted to $50,000 or the vested account balance, if less. That limit may now be increased up to $100,000 (minus any outstanding loans already held by the individual), or the vested benefit under the plan if it is less than $100,000.
Q Does the CARES Act eliminate required minimum distributions for individuals who would otherwise be required to take them?
A Required minimum distributions have been suspended for 2020. The suspension will apply for everyone with an IRA or a defined contribution type of account, but not for individuals who are participants in defined benefit plans that are required to take withdrawals.
Q Can I roll over the required minimum distribution that I took early in the year?
A Individuals who took their required distribution during the month of January 2020 are not able to roll those distributions into an IRA account. Additionally, individuals who took a series of distributions each month can only roll over one month’s distribution in 2020. That is because the rollover rules only allow one rollover for every 12 calendar months. Individuals who took distributions in February, March or April have until July 15 of 2020 to roll those distributions over if they choose.
Q Can I still make a qualified charitable distribution from my IRA in 2020?
A One of the requirements to make a qualified charitable distribution from an IRA is that the distribution can only be made by individuals who are subject to required minimum distributions. Even though required minimum distributions have been suspended, you may still give IRA money directly to a charity in 2020. Additionally, even though required minimum distributions do not begin until age 72, the previous law allowing those distributions to begin at age 70½ remains in place.
Q Are there other planning issues that I might think about during this year when required distributions are suspended?
A Depending on your personal income tax situation, 2020 may be a year where it makes sense for you to consider converting some IRA money to a Roth IRA. It is known that the Tax Cuts and Jobs Act of 2017, which reduced brackets, will expire in 2025. Without Congress having to do anything, income tax rates will rise. It may make sense for you to discuss with your tax advisors exactly where the sweet spot may be for you to consider a Roth conversion.

There are many additional issues surrounding the uncertainty that has been brought about by this pandemic. We at REDW Wealth stand ready to help you understand the changes in the tax law and planning strategies you might want to consider during this year.

Copyright 2020 REDW Wealth LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.


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