Did you know that the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed into law on March 27, 2020 includes a multitude of provisions, including various changes to the rules and regulations surrounding retirement plan distributions and loans?
Considerations for “Qualified Individuals”:
As it relates to retirement plans, many of the provisions set forth in the CARES Act are limited to “Qualified Individuals”. The definition starts narrow, but expands to include many people:
- Individuals diagnosed with SARS-CoV-2 or COVID-19
- Individuals whose spouse contracts the above virus or disease
- Individuals who, as a result of the above virus or disease, experience adverse financial consequences due to:
- Being quarantined
- Being furloughed or laid off
- Having reduced work hours
- Being unable to work due to lack of child care
- Closing or reducing hours of a business operated by the individual
- Other factors, as determined by the Secretary of the Treasury
An employee must certify to the administrator of an eligible retirement plan that the employee satisfies these conditions.
The CARES Act has introduced a new distribution type: Coronovirus-Related Distributions. These distributions are limited to $100,000 for Qualified Individuals and provide relief that otherwise would not be provided under previous laws. Coronavirus-Related Distributions are only permitted between January 1, 2020 through December 31, 2020. Unlike Hardship Distributions, the amounts withdrawn are not limited to financial need, although you must be a Qualified Individual to withdraw amounts.
One of the more significant provisions related to these distributions is the waiving of the 10% penalty for withdrawals prior to attaining age 59.5. While amounts are not tax-free, the income related to the distributions are permitted to be reported ratably over the 3-year period beginning in the tax-year in which the distribution occurred. This can be a beneficial tax strategy, as it is generally advisable to defer taxable income as much as possible.
Retirement Plan Loans
Loans Issued to Qualified Individuals Prior to the CARES Act
Any retirement plan loan issued to a Qualified Individual that was scheduled to end between March 27, 2020 through December 31, 2020 may be suspended one year. For loans that are suspended, the payment terms must be re-amortized to factor in the additional one-year delay period. Current regulations require that the repayment terms on retirement plan loans are no longer than five years (unless used for the purchase of a residence). The delay period is not factored into this determination, so these loans are permitted to have terms greater than five years.
Loans Issued to Qualified Individuals Within 180 Days of the CARES Act
The CARES Act altered certain rules for retirement plan loans issued to Qualified Individuals between March 27, 2020 through September 23, 2020. Prior to the CARES Act being signed, loans were limited to the lesser of $50,000 or 50% of the individual’s nonforfeitable account balance. The CARES Act has increased the maximum loan amount to the lesser of $100,000 or 100% of nonforfeitable account balance.
Considerations for All Individuals:
Required Minimum Distributions (RMD)
In general, all RMD’s that would be required during 2020 are waived under the CARES Act. These provisions are available to everyone, not limited to just Qualified Individuals. It should be noted that the Setting Up Every Community for Retirement Enhancement Act of 2019 (“SECURE Act”) changed the RMD age from 70.5 to 72, but individuals who achieved age 70.5 during 2019 were still required to take the distributions. Certain of these RMD’s from 2019 were not required to be made until April 2020; these distributions are also waived.
Now may be a great time to consider a converting a traditional IRA to a Roth IRA. In a Roth conversion, taxes are owed based on the dollar value converted. Because of the downturn of the market your retirement investments may be at a low-point, and therefore a relatively lower tax bill may be assessed upon conversion compared to other when you plan on withdrawing for retirement. Further, the current tax rates which are fairly low may increase with the increased government spending in the recent weeks. There are some disadvantages to a Roth conversion, primarily that it will increase your current taxable income which may prohibit your ability to receive amounts in the new stimulus check from the CARES Act. Consider carefully before making any decisions regarding a Roth conversion.
Check out LGA’s COVID-19 resource page for an overview of all programs available to provide relief and contact a team member if you or your business needs a hand with navigating through the difficulties that the coronavirus has caused.
by Adam Shaker CPA, MSA