Latest News
Firm news and client alerts that may be beneficial
Retirement Plan Update – Modified Distribution Rules Under The CARES Act
Retirement Plan Update – Modified Distribution Rules Under The CARES Act
By: Stewart M. McGough
Headlines trumpeting the CARES Act that was signed into law on Friday, March 27, 2020, focused on trillions of dollars to be furnished to individuals and businesses in response to the novel coronavirus pandemic hitting the country. But stuck into the legislation were some helpful temporary changes to the distribution and tax rules that apply to defined contribution (DC) retirement plans and individual retirement accounts (IRAs). This news item will list those changes.
1. Only Defined Contribution Plans and IRAs. The new rules apply only to IRAs and the following defined contribution retirement plans — 401(k), profit sharing, 403(b) annuities and custodial accounts, and 457(b) salary deferral arrangements sponsored by governments and their agencies. They do not apply to defined benefit plans.
2. Restricted to COVID-affected individuals. The new rules allow distributions from plans and IRAs, and loans from plans other than IRAs, to any IRA owner or beneficiary of a retirement account who is “COVID-affected” (any one of the following):
- An individual diagnosed with the SARS-CoV-2 virus or with the COVID-19 disease that develops from the virus
- A spouse or dependent who is so diagnosed
- An individual employed with some business, government or NGO who “experiences adverse financial consequences” as a result of any of the following actions taken due to the pandemic:
- Quarantine
- Furlough
- Lay-off
- Reduction in hours
- Having to care for a child because day care is unavailable due to the pandemic
- A business owner (which includes those who are self-employed and those who own business entities) who closes the business or reduces the hours of the workforce due to the pandemic
In the case of retirement plans, the employee merely needs to provide a certification to the plan administrator that the employee fits within one of these categories. Of course, if the plan administrator knows the facts of the situation to be other than as presented by the employee, those facts should not be simply disregarded.
3. Distributions. The Act allows distributions in 2020 to a COVID-affected individual totaling up to $100,000 from one’s account and regardless of one’s age. For example, the 401(k) rules prohibit an individual from drawing out any of his or her salary deferral contributions from the Plan until age 59½. Many Plans prevent any distribution so long as the individual is still employed with the sponsoring employer.
The new temporary rule allows a distribution regardless of the individual’s age and regardless of any other restrictions that the Plan may have in place. The Plan sponsor will have to adopt an amendment to the Plan to permit the distribution, but that amendment need not be adopted until the end of the 2022 plan year (this aligns with the date by which required changes have to be made to the Plan under the SECURE Act enacted this past December).
Any qualifying distribution will be subject to regular income tax but will be exempt from the 10% penalty tax that normally applies if the individual is under age 59½ on the date of distribution.
Normally, there is 20% income tax withholding on single sums distributed from a qualified plan. The Act waives this for qualifying distributions, so the individual can use all of the distribution immediately.
To alleviate the income tax burden, the individual can spread the income that is recognized from the distribution ratably over as many as 3 years (2020-2022). That could mean a sizeable tax savings if the family’s income is significantly impaired over the next year or so.
4. Repayment of Distribution. A COVID- affected individual who receives a distribution will have the option to repay the distribution to the Plan, or to any other plan in which the individual is participating (including an IRA), within 3 years of the distribution. In effect, the distribution would become an interest-free loan. How this will be reported will have to come from future IRS guidance, but presumably the employee would have to amend his/her return from the prior year(s) in which the income was claimed to reclaim the taxes paid in the earlier years.
5. Loans. Prior law limited loans to individuals from their retirement plans (no loans are permitted from IRAs) to the lesser of 50% of their account balance or $50,000. The Act allows a COVID-affected individual to borrow his or her entire account balance up to $100,000 from now until September 25, 2020. If the individual has any loan already outstanding, the highest principal balance that existed over the prior 12 months must be deducted from the $100,000 maximum to arrive at the available loan amount.
A COVID-affected individual who already has a loan outstanding, or who obtains a new loan under the Act’s expanded limits, is given a grace period of all of 2020 on any repayment scheduled to be made in 2020. While interest will still accrue on the outstanding loan balance, the repayment period is extended out by the length of the grace period.
6. Required Minimum Distributions – 2020 a Grace Year. DC Plans and IRAs must distribute to account owners a required minimum distribution (RMD) each year to individuals who have attained age 72 (a DC Plan participant who is not a 5% owner of the employer can delay this until he or she actually retires from service). The age use to be 70½ before 2020.
The Act allows any individual who began receiving RMDs prior to 2020 to opt to receive a distribution of as little as $0 in 2020. Then, beginning in 2021, the RMDs would pick up again, but there would be no “make-up” distribution required in 2021. You do not have to be a COVID-affected individual to obtain this relief.
What if you already received your scheduled 2020 RMD? There is no special rule under the Act that allows return of that distribution to the distributing plan. However, you can take advantage of the 2020 exemption rule by rolling the distribution to a qualified plan (that accepts rollovers), or to an IRA, if done within 60 days of the distribution.
If an individual who is over age 70½ is scheduled to begin to receive his first RMD by April 1 of this year, he or she can delay that distribution until 2021. There would be no “make-up” distribution in 2021.
Certainly, there’s a lot here to digest and we hope these changes will benefit our clients and all plan and IRA participants. Always feel free to call any of the members of the Pension Department for answers to any of your questions on this or any other topic.
Stewart M. McGough (315) 477-6225
Catherine A. Ray (315) 477-6250
Jean A. Borrow (315) 477-6258
