Coronavirus-related relief for retirement plans and IRAs
The CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from an eligible retirement plan (e.g., 401(a), 401(k), 403(b), and 457 plans), and IRAs to qualified individuals, as well as special rollover rules with respect to such distributions.
A coronavirus-related distribution is a distribution from an eligible retirement plan or IRA to a qualified individual from January 1, 2020 to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.
A qualified individual is someone who has (i) a coronavirus-related diagnosis based on a CDC-approved test, (ii) a spouse or dependent with such a diagnosis, or (iii) experienced certain coronavirus-related adverse financial consequences.
The CARES Act also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.
Waiver of 10% early distribution penalty.
The additional 10% tax on early distributions from such plans and IRAs is waived for coronavirus-related distributions, which may, subject to guidelines, be re-contributed to the plan or IRA.
Deferral of Income Tax on Coronaviraus-Related Distributions.
Income arising from coronavirus-related distributions is spread out over three years unless the recipient elects to turn down the spread out.
Waiver of Required Distribution.
Required minimum distributions (RMD) that otherwise would have to be made in 2020 from defined-contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70½ in 2019. While the CARES Act does not specifically address inherited IRAs, beneficiaries of inherited IRAs from account owners who died before January 1, 2020 should not have to take an RMD in 2020. For beneficiaries of inherited IRAs from account owners who died after December 31, 2019, the 10-year period for non-eligible designated beneficiaries of inherited IRAs from account owners does not begin until 2021. For non-designated beneficiaries of inherited IRAs who are receiving distributions over a 5-year period, like estates and charities, 2020 will not count as one of the five years.
Note: Roth IRAs do not require minimum distributions during the account owner’s lifetime.
Increased Limits on Nontaxable Loans.
Limits on nontaxable loans from qualified employer plans, to a qualified individual during the 180-day period beginning on Mar. 27, 2020, and ending Sept. 22, 2020, are increased from $50,000 to $100,000, and the benefit percentage limit is increased from 50% to 100% of the present value of the employee’s nonforfeitable accrued benefit.
Delayed Due Date for Qualified Plan Loans.
If a qualified individual has an outstanding plan loan from a qualified employer plan, any repayment of the loan that is due during the period beginning Mar. 27, 2020, and ending on Dec. 31, 2020, “shall be delayed for 1 year”. Any later loan repayments must be adjusted to reflect the delay in the due date and any interest accruing during the delay. In determining the five-year term limit and level amortization requirement for such loans, the one-year period described above must be disregarded.
An employer is permitted to choose whether, and to what extent, to amend its plan to provide for COVID-19-related distributions and/or loans that satisfy the provisions of section 2202 of the CARES Act. Thus, e.g., an employer may choose to provide for COVID-19-related distributions but choose not to change its plan loan provisions or loan repayment schedules. Even if an employer does not treat a distribution as COVID-19-related, a qualified individual may treat a distribution that meets the requirements to be a COVID-19-related distribution as COVID-19-related on the individual’s federal income tax return. The IRS has announced that the rules adopted to implement the retirement plan relief provisions enacted following Hurricane Katrina—KETRA—will be followed in implement the retirement plan relief provisions of the CARES Act.