Announcements

Note: The article was updated to reflect the Internal Revenue Service Notice(s) 2020-50 and 2020-51, which provide additional guidance on coronavirus-related distributions and loans and the waiver of 2020 RMDs, including expanding the definition of qualified individuals and extending the rollover period for required minimum distributions (RMDs) taken this year.

Background on the CARES Act

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, 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 70½ 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. A 2020 RMD is also waived for an individual whose “required beginning date” is April 1, 2021.

• 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

CRDs 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.

An eligible individual is defined as someone:

• Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease (collectively referred to as 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:
  
  • The individual, the individual's spouse or a member of the individual's household (defined as someone who shares the individual's principal residence) being quarantined, being furloughed or laid off or having work hours reduced due to COVID-19
  • The individual, the individual's spouse or a member of the individual's household being unable to work due to lack of childcare due to COVID-19
  • Closing or reducing hours of a business owned or operated by the individual, the individual's spouse, or a member of the individual's household due to COVID-19
  • The individual, the individual's spouse or a member of the individual's household having a reduction in pay (or self-employment income), a job offer rescinded or start date for a job delayed due to COVID-19.

• 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 may be extended by up to one year, regardless of the length of the loan's original term.

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 financial professionals 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: A distribution taken earlier this year to meet an RMD requirement is eligible to be repaid to the distributing IRA or a plan that accepts rollovers by the extended August 31, 2020, deadline. Investors should complete the Indirect Rollover Request. This repayment will not count toward the one rollover per 12-month period limitation for IRAs.

After August 31, 2020, a distribution taken to meet an RMD requirement is only eligible to rollover if it's within the 60-day indirect rollover period and it is the only rollover in a 12-month period. Investors should complete the Indirect Rollover Request.

For inherited IRAs: The restriction on rollovers by non-spouse IRA beneficiaries is waived. Non-spouse IRA beneficiaries are eligible to repay an RMD back into the distributing inherited IRA by August 31, 2020.


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: Investors can take a distribution from an IRA at any time. However, to qualify for the special tax rules for CRDs (up to $100,000), they must be an eligible individual (as defined above) and the distribution must be taken on or after January 1, 2020, and before December 31, 2020.


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 provided guidance on how to report these distributions on their taxes. Refer to IRS Notice 2020-50.


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
• Tax break (income tax on the distribution can be spread over three years)
• Rollover right and reversal of tax consequences

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 and does not count toward the one rollover per 12-month period limitation for IRAs. The taxpayer will be able to recover tax previously paid in connection with CRDs that are rolled back into an IRA or plan. The IRS provided guidance on how to reverse the tax consequences of CRDs that are later rolled back into an IRA or plan. Refer to IRS Notice 2020-50.


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. The IRS provided an example of acceptable certification in IRS Notice 2020-50.


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.