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What the CARES Act and new IRA provisions mean for your clients

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The CARES Act, signed into law on March 27, has wide-ranging implications for clients with employer-sponsored qualified retirement plans and individual retirement accounts. Once this act was passed, the IRS then issued several notices with additional information and guidance related to the $2.2 trillion economic stimulus bill.

Here are some important provisions:
1. Permit an additional withdrawal of up to $100,000 for coronavirus-related distributions (CRDs);
2. For plans, permit an increase in the available loan amount to the lesser of 100% of a participant's vested account balance or $100,000 and provide relief from loan repayments; and
3. Waive required RMDs for 2020.

Since each of these provisions affect clients who work at organizations of all sizes, I've offered a high-level overview of each one.

Tax-favored CRDs from qualified retirement plans and IRAs

The 10% penalty on early withdrawal of retirement funds will not apply for any CRDs up to $100,000 through December 31, 2020. A CRD is a distribution made in 2020 from a qualified retirement plan, which includes a 401(k) plan, 403(b) plan, 457(b) plan, individual retirement account, or individual retirement annuity — to a qualified individual. The $100,000 threshold is aggregated per individual across employer-sponsored qualified retirement plans and IRAs.

While the early withdrawal fee has been waived, income taxes will still be required on CRDs, but recipients can do so over three tax years (2020, 2021 and 2022). Additionally, CRDs may be repaid to a qualified retirement plan in which you participate or an IRA (in one or more payments) at any time during the three-year period beginning on the day after the date on which the distribution was received, and those repayments will be treated as a tax-free rollover, without regard to any annual contribution cap.

Loans from qualified retirement plans (coronavirus-related loans)

The CARES Act has two optional relief provisions for qualified retirement plans that offer loans.

Under Internal Revenue Code section 72(p), the limit for loans from a qualified retirement plan is 50% of a participant's vested account balance or $50,000, whichever is less. Under the CARES Act, plans that choose to take advantage of the expanded loan limitations may allow for loans up to 100% of a participant's vested account balance or $100,000, whichever is less. This is a temporary provision and is only permitted for loans that are made during the 180-day period beginning on the date of enactment, which was March 27, 2020. Qualified retirement plans can also choose to offer a one-year suspension on loan repayments due between March 27, 2020 and December 31, 2020.

CRDs and both the expanded loan limit and the loan payment suspensions are optional provisions for employer plans. The CARES Act allows the employer to formally amend the plan for these elective provisions through the end of the 2022 plan year. Participants in an employer plan that offers CRDs and/or expanded loan provisions need only to self-certify that they meet one of the coronavirus-related eligibility requirements. Plan sponsors may accept the self-certification unless they have actual knowledge, at the time of the distribution or loan request, that the participant does not meet one of the eligibility requirements.

A qualified individual is anyone who:

  • Is diagnosed, or whose spouse or dependent is diagnosed, with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences as a result of the individual, the individual's spouse, or a member of the individual's household (that is, someone who shares the individual's principal residence): being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; being unable to work due to lack of childcare due to COVID-19; closing or reducing hours of a business they own or operate due to COVID-19; having pay or self-employment income reduced due to COVID-19; or having a job offer rescinded or start date for a job delayed due to COVID-19.

Waiver of RMDs

Under the CARES Act, all 2020 RMDs have been waived. There are no coronavirus eligibility requirements associated with this change. For 2020 distributions that were RMD payments prior to the law change, the following relief is available to restore these funds to a plan or IRA:

  • 2019 RMDs that were not taken before January 1, 2020 and that were required to be taken by April 1, 2020 are also waived.
  • Distributions received as RMDs in 2020 are eligible for rollover.
  • The 60-day rollover period for distributions that would have been RMDs but for the CARES Act waiver taken after December 31, 2019 and prior to July 2, 2020 has been extended to August 31, 2020.
  • Distributions taken after July 1, 2020 are subject to the regular 60-day rollover rule.
  • For IRAs, waived RMDs taken from beneficiary accounts may be recontributed to the distributing inherited IRA account by August 31, 2020.
  • The one-rollover-per-year rule applicable to IRAs does not apply to the repayments of these RMDs to the distributing account by August 31, 2020.
  • Should you wish to receive the amount that would have been your RMD (or another amount), you may still take the RMD.
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