09 Apr 2020 COVID-19 Retirement Plan Changes
The last four months have been a tumultuous time for retirement plan distribution rules and in particular Required Minimum Distribution (RMD) rules.
SECURE ACT CHANGES
In late December 2019, long before Coronavirus was much of a thought here in the United States, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed. Among other provisions, the SECURE Act raised the age for RMD’s from 70 ½ to 72. This change did not affect those that were already 70 ½ or turned 70 ½ in 2019 (anyone born before June 30, 1949 was not affected). Somewhat unrelated to RMD is the provision of the Act that requires most inherited IRA’s from owners passing away in 2020 to be taken out over ten years.
CARES ACT CHANGES
Then came the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law on March 27, 2020. The Act made numerous changes to the RMD date rules.
Required Minimum Distributions (RMD’s) Not Required in 2020
The first major impact is the suspension of any RMD’s previously required in 2020. The rule applies to any RMD required from IRA’s, 401(k)s and Defined Contribution Plans. Also included in the suspension were required distributions from Inherited IRA accounts. Since all these distributions are based on the Fair Market Value of the account as of the prior December 31st, the substantial decline in the markets since then would have required a disproportionate distribution requirement compared to the fair market value of those same accounts today. Note: required distributions from Defined Benefit Plans are not suspended.
Somewhat of an anomaly, if a recipient turned 70 ½ in 2019 and was required to take their first distribution in 2019, but under an allowable option, elected to delay that distribution until April 1st of the subsequent year (2020), the required distribution due by April 1st is also suspended.
What if I’ve already taken my 2020 RMD?
What if some or all these required 2020 distributions were already taken? For these, there may be some relief. Since RMD’s have been eliminated for 2020, these distributions would now be considered normal distributions. The 60-day rollover rules would apply. Keep in mind, however, that only one distribution and recontribution per twelve-month period is allowed under the 60-day rollover rule.
Two particular types of distributions however would not be eligible for this 60-day rollover relief as they have never been eligible for the 60-day recontribution rules. These would include distributions from Inherited IRA’s as well as distributions being taken subject to the 72(t) substantially equal periodic payment rules.
Another option would be to take advantage of the Roth Conversion rules by taking any distributions that would no longer have been required and have them converted to a Roth. These are not subject to the 60-day rollover rules but would still be subject to income tax.
Another important note related to these distributions that have already been taken is dealing with any federal income tax withheld from the distributions. In order to utilize the 60-day rollover or Roth Conversion options, the amount of taxes withheld will have to be dealt with out of other personal funds, presumably to be “refunded” when the 2020 tax return is filed.
Tax Planning Considerations
Many retirees have been withdrawing additional funds each year following the 2017 tax legislation that lowered the tax brackets to 12%, 22% and 24% with the belief that they may never see such low rates again. Also, some have taken advantage of these rates to convert Traditional IRA’s into Roth IRA’s as part of their long-term tax planning. While this legislation allows deferral of RMD’s it may be more advantageous to also consider maximizing the benefits of the lower tax rates.
Coronavirus-Related Distribution (CRD) waives the 10% Penalty
The second major impact of the CARES Act related to retirement plan distributions is the qualified “Coronavirus-Related Distribution” or CRD. The CARES Act waives the 10% penalty for early withdrawals for a CRD made anytime in 2020 by someone under the age of 59 ½ that would otherwise be subjected to the penalty. Under the Act, certain affected individuals may withdraw in one or more distributions up to $100,000 between January 1st and December 31st, 2020 without being subjected to the 10% penalty.
In order to be eligible for the penalty free withdrawal:
The plan participant, their spouse or a dependent must have been diagnosed with COVID-19.
The plan participant must have experienced adverse financial consequences due to COVID-19 as a result of being quarantined, furloughed, laid off, reduction in work hours, unable to work due to lack of child care, or closing of an owned business or other factors later determined by the Treasury Secretary. The plan administrator may rely upon the employee’s certification that the distribution qualifies as a CRD.
Special Taxation Rules for CRD’s
Normal income tax still applies to the distributions. The taxation of the income from the distributions may, at the option of the recipient, be spread over three years rather than solely in the year of the distribution.
In addition to the taxable income being spread over a three-year period, repayment may also be made for some or all of the distributions. Repayment can be made in one or more installments within three years beginning one day after the date of any specific CRD and the taxation on those amounts would be eliminated. Granted, these repayments may result in an amended return requirement to claim a refund of previously paid taxes on prior year reporting of the income.
Expanded borrowing rules for 401(K) loans
Additionally, if a recipient meets the same criteria above, the CARES Act has provisions allowing a plan participant to borrow the lesser of $100,000 or 100% of their vested balance in the plan. These are changes from the existing rules allowing for a maximum loan of $50,000 and 50% of the vested balances. It should be noted that Plan Sponsors are not required to adjust their plans for these new loan allowances, but they have until December 31, 2022 for calendar year plans.
Loans made under this provision must be made within 180 days of the enactment date of March 27, 2020. Additionally, participants with existing loans with a repayment date from March 27, 2020 through December 31, 2020, may delay the required date of repayment of those loans by one year and additional loan terms may be extended by one year.
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