CARES Act Provides Individuals with Special Rules for Qualified Retirement Plans and IRAs
In response to the COVID-19 pandemic, President Trump signed the historic CARES Act, or Coronavirus Aid, Relief, and Economic Security Act, on March 27, 2020. The act provides relief to American taxpayers through changes to the Required Minimum Distribution Rules (RMDs) and favorable withdraw provisions from individual retirement accounts and qualified retirement plans. It is important for clients to review the new rules as they may apply to them to determine if it may be beneficial financially or for estate planning purposes to utilize the opportunities provided by the changes.
Temporary Waiver of Required Minimum Distributions
The CARES Act waived the required minimum distribution rules for the 2020 calendar year for all individuals that would otherwise be required to take an RMD or to start their RMDs in 2020. An RMD is the amount of money that an individual must withdraw from the retirement account each year. The RMD waiver includes individuals who would have started their RMDs due to the fact they turned 70½ in 2019 which would be due by April 1, 2020. The effect of this rule is that it will minimize the amount an individual would be required to withdraw in 2020 due to the fact that minimum required distributions are based upon the fair market value of the accounts on December 31, 2019, (when the market value of the accounts was obviously much higher). The act also provides one additional year for any beneficiaries that are subject to the five-year payout rule.
Tax Favored Withdrawals from Retirement Plans
The CARES Act also includes provisions that allow certain affected Americans to utilize a portion of their retirement plan to assist them financially during this time. Such a distribution will be known as a “coronavirus-related distribution” (CRD). To qualify for this distribution, there are two requirements an individual must meet to be considered a “qualified individual”:
1. The distribution must be taken on or after January 1, 2020, and before December 31, 2020; and
2a. The individual, the individual’s spouse or the individual’s dependent must be diagnosed with SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the CDC, or
2b. The individual must be experiencing a financial hardship as a result of COVID-19 by:
-Furloughed, laid off or reduced work hours;
-Unable to work from lack of childcare;
-Closing or reducing hours of business owned or operated by the individual.
Therefore, if you are a qualified individual, you may choose to utilize your retirement plan, and to withdraw up to $100,000 penalty and interest free. If you take a CRD, you have the option to repay the money to the plan, but it is not required. If you choose to repay all or a portion of the distribution, the payments must be made within three years of the date of the distribution.
While the provisions of the act waive the penalties and interest for a CRD, the distribution will be taxable income. By default, the act will include the income from the CRD ratably over a three-year period, beginning with tax year 2020. You can make an affirmative election to waive the three-year spread of the income and choose to have all of the income allocated to the 2020 income tax year if it is more advantageous to you as a taxpayer.
Increase in Limit on Loans Not Treated as Distributions
Before passage of the act, retirement plan participant loans were limited to $50,000. For a period of time commencing on the date of the passage of the act and concluding 180 days thereafter, a qualified individual, as defined above, now has the option to take up to $100,000 as a loan against a qualified plan. If a qualified individual already has an outstanding loan against a qualified plan with a payment due between the enactment of the act and December 31, 2020, the payment is delayed for one year and all subsequent payments are delayed accordingly.
The CARES Act also provided some relief for employers regarding qualified retirement plans. For more information on the effect of the CARES Act as it relates to employers, please see the article by Jeffrey D. Snavely.
Should you have any questions regarding distributions for individuals, please contact one of our estate planning attorneys.
At the date of publication the above information was correct. It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation.
The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.