FAQs on how the CARES Act may affect your clients | Capital Group

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May 5, 2020

FAQs on how the CARES Act may affect your clients

The stimulus bill known as the CARES (Coronavirus Aid, Relief, and Economic Security) Act was signed into law on March 27, 2020. The act is designed to help mitigate the impact that coronavirus (COVID-19) is having on the U.S. economy and includes temporary relief specific to certain types of transactions in IRAs and retirement plans.

The provisions:

  • Waive required minimum distributions (RMDs).

    RMDs for 2020 are waived for all types of defined contribution plans and IRAs including:
    • Traditional, Roth, SIMPLE, SEP and SARSEP IRAs
    • Inherited IRAs
    • 401(k)
    • 403(b)
    • Governmental 457(b) plans

The waiver also affects 2019 RMDs for individuals who attained age 70 ½ in 2019 and deferred their 2019 RMD payment until April 1, 2020. If the individual did not distribute their RMD in 2019, then the waiver applies.

  • Creates special tax rules for coronavirus-related distributions (CRDs) up to $100,000.
    • Relief from required 20% withholding on CRDs
    • Income from CRDs can be taken into account for tax purposes over three years
    • Waives early distribution penalty tax (typically 10%)
    • Allows for rollovers back within three years and, if rolled back, then reversal of any income tax paid on CRD

The distribution must be taken on or after January 1, 2020, and before December 31, 2020. The maximum amount for an individual across all their plans and IRAs is $100,000.

The Act defines an eligible individual as someone:

  • Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
  • Whose spouse or dependent (as defined in Code section 152) is diagnosed with such virus or disease, or
  • Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury
 
  • Permits plans to offer enhanced loans to individuals meeting the same CRD eligibility criteria outlined above.
    • For the 180-day period beginning on the date of the law’s enactment, the maximum loan limit for eligible individuals is the lesser of:
      • $100,000 (up from 50,000)
      • 100% (up from 50%) of the participant’s vested account balance
  • Paused retirement plan loan repayments during 2020 for individuals meeting the same criteria as CRDs and extends the repayment period.
    • For eligible individuals, loan repayments due during the period beginning on March 27, 2020, and ending on December 31, 2020, may be suspended. The term of the loan is extended by the duration of the suspension period, regardless of the length of the loan's original term.

Some of the provisions will be subject to future guidance. We will provide more information as it becomes available.

Frequently Asked Questions

The following is meant to highlight some of the key changes that impact individual retirement accounts (IRAs) and employer-sponsored retirement plans.

Required Minimum Distributions (RMDs) Waiver

Q: My client has automatic payments established for the 2020 RMD. Will the RMD be automatically deferred?

A: No. Investors and/or advisors need to direct us to modify or defer an automatic withdrawal plan. We can take the request verbally or in writing.

 

Q: My client already took a 2020 RMD payment from my IRA. Can it be returned?

A: If it’s within the 60-day indirect rollover period, a distribution taken earlier this year to meet a 2020 RMD requirement is eligible to roll over back into the IRA. Investors should complete the Indirect Rollover Request. Current law only allows one rollover per year for indirect rollovers from IRA to IRA. The IRS extended the 60-day rollover period for distributions taken between February 1, 2020, and May 15, 2020. Investors now have until July 15, 2020, to rollover a distribution taken during this period.

Non-spouse beneficiaries are not eligible to roll over a distribution back into an inherited IRA.

 

Q: My client is a beneficiary taking distributions on the 5-year rule, how does the 2020 RMD waiver apply?

A: The 5-year period is determined without regard to calendar year 2020.

Example: A beneficiary of an individual who died in 2018 is following the 5-year rule. The 5-year period ends in 2024 instead of 2023.

Note: These changes do not apply to beneficiaries who will be taking distributions based on the 10-year rule.

 

Coronavirus-related distributions (CRDs)

Q: My client is impacted by COVID-19. Are they eligible to take a coronavirus-related distribution from their IRA?

A: The Act defines an eligible individual as someone:

  • Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
  • Whose spouse or dependent (as defined in Code section 152) is diagnosed with such virus or disease, or
  • Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury

Investors can take a distribution from an IRA at any time.

 

Q: How does my client request a CRD from their IRA?

A: To request a distribution, we can take the request verbally or by having your client complete and submit the “IRA Single Distribution Request.”

The IRS may provide additional guidance regarding how to report these distributions on their taxes.

 

Q: If my client takes a CRD from a SIMPLE IRA during the first two years, is the 25% early distribution penalty waived?

A: Yes, CRDs are not subject to an early distribution penalty.

 

Q: Do retirement plans have to permit CRDs or enhanced loans?

A: No, an employer can decide whether to offer CRDs and/or enhanced loans.

 

Q: Can my client take a CRD from their employer-sponsored retirement plan, such as a 401(k), 403(b) or governmental 457(b)?

A: Investors must check with their employer that a CRD is a distribution event offered by the plan. If they are otherwise eligible for a distribution, they can request a distribution under that event and still take advantage of the:

  • Waiver of the early distribution penalty
  • Inclusion of income tax over three years
  • Rollover right and possible reversal of tax consequences
  • No 20% withholding

 

Q: If my client later wants to repay a CRD back into their IRA or retirement plan, how much time do they have to repay it?

A: Investors have three years beginning on the day after the date the distribution is made. They can repay the amount distributed or a lesser amount to an IRA or qualified plan that accepts rollovers. The repayment is treated as a rollover. The taxpayer will be able to recover tax previously paid in connection with CRDs that are rolled back into an IRA or plan. We expect the IRS to publish guidance on how to reverse the tax consequences of CRDs that are later rolled back into an IRA or plan.

 

Q: Does the employer have to verify whether a participant is eligible for a CRD or an enhanced loan?

A: The CARES Act allows plan administrators to rely on an employee’s certification that the employee satisfies the CRD eligible conditions.

 

Q: Can a SIMPLE IRA plan stop, defer or delay making employer contributions?

A: The IRS and Department of Labor (DOL) haven't provided any relief for mid-year changes to SIMPLE IRA employer contribution rules.

Standard SIMPLE IRA contribution rules:

  • The employer has until the employer’s tax-filing deadline to contribute any employer contributions due.
  • Depending on which employer contribution option the employer elected, there may or may not be an employer contribution obligation.

Example: If the plan has eligible participants not making salary deferral contributions, and the employer elected the matching contribution option, there isn't an employer contribution due.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.