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Recent Retirement Plan Changes Assist Individuals during COVID-19 Crisis

By: Dean Dorton | April 15, 2020

COVID-19 | COVID-19 Wealth & Estate Planning | Tax | Wealth & Estate Planning

As most everyone knows by now, the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”) recently signed into law provides an extensive relief package covering various forms of assistance, from increased loans, to rebate checks and other tax breaks, to benefits in the areas of healthcare, education, retirement accounts, and more. In this communication, we focus primarily on the relief provisions of the Act dealing with retirement accounts. However, before delving into the CARES Act, we highlight some recent changes to the timing of 2019 retirement contributions, which resulted from the Department of Treasury’s decision to postpone the 2019 tax filing deadline.

Timing of 2019 Retirement Contributions

Timing of IRA Contributions for Tax Year 2019

Along with the decision to push back the 2019 tax return filing date from April 15, 2020 to July 15, 2020, the date for making 2019 contributions to Individual Retirement Accounts (whether traditional or Roth IRAs) has also been extended to July 15. The revised due date of July 15, 2020 also applies to 2019 contributions to Health Savings Accounts (HSAs), Archer Medical Savings Accounts, and Coverdell Education Savings Accounts.

This 90-day reprieve is particularly helpful for those whose cash flows have been negatively impacted by COVID-19. However, with the stock market currently down, taxpayers will need to weigh the possible advantage of making IRA contributions now, in hopes of taking advantage of any market rebound between now and July 15, with the benefits of being able to conserve current cash and postpone making a decision about 2019 contributions. If a taxpayer does make a 2019 contribution after April 15, he or she should make sure that the custodian codes it as a 2019 contribution.

Timing of IRA Contributions for Tax Year 2019

If employer contributions to a company retirement plan (including a Simplified Employee Pension or “SEP” Plan) were originally due on April 15, the deadline for making those contributions is also pushed back to July 15, 2020. If the employer extends its tax return past the July 15 date, contributions may continue to be made up until the extended due date of the employer tax return.

Retirement Plan Provisions in the CARES Act

Waiver of 2020 Required Minimum Distributions (‘RMDs’)

The retirement provision of the CARES Act with arguably the most widespread applicability is the one that waives RMDs for calendar year 2020 for IRAs and certain defined contribution plans. For individuals that can afford to forego their 2020 RMD, two key benefits potentially result:

  • Reduced Taxes – Most individuals will have reduced 2020 income taxes because there will be no RMD includible in 2020 taxable income.
  • Preservation of Tax-Deferred Monies – The RMD for a given year is generally based on one’s remaining life expectancy and the balance in the retirement account as of the preceding December 31. Given the strong stock market as of December 31, 2019 (relative to current values), were it not for this RMD relief, many account owners would be forced to withdraw a greater percentage of their account balance than their current account values would suggest is warranted. By foregoing the 2020 RMD, account owners will be able to preserve their tax-deferred balances for a longer period of time and hopefully enjoy a rebound in market prices while their monies are still inside qualified accounts.

For those who already took their RMDs from an IRA in early 2020, it may not be too late to take advantage of the RMD relief. Additional guidance is expected, but it appears that a 2020 RMD already taken from an IRA may be “undone” if the distribution is eligible to be rolled over. Generally, to be eligible:

  • The distribution must be rolled back into the IRA within 60 days of receipt;
  • The RMD recipient must not have made an IRA-to-IRA or Roth IRA-to-Roth IRA rollover in the 12 months preceding the receipt of the 2020 RMD; and
  • For beneficiary accounts, only spouse beneficiaries can “undo” RMDs already taken; non-spouse beneficiaries of inherited accounts are not eligible.

We are still awaiting guidance from the IRS on the availability of this relief for individuals who took RMDs in early 2020.

Ability to Take Penalty-Free Distributions from IRAs and Certain Company Plans

The CARES Act permits qualified individuals to withdraw as much as $100,000 from their IRA or other eligible retirement plan during 2020 without incurring a 10% early withdrawal penalty (normally imposed on those under age 59 ½). A qualified individual is:

  • A person who has been diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention or whose spouse or dependent has been diagnosed with the virus by such a test; or
  • A person whose finances haven been negatively impacted by the pandemic as a result of a layoff, reduced hours, being quarantined, the inability to work because of lack of childcare, or other similar reasons as determined by the Secretary of the Treasury.

Withdrawn funds will be treated as a special tax-exempt rollover if repaid in one or more installments within the three-year period beginning on the day following the date of distribution. If the funds are not repaid, they will be taxed as income over three years, beginning in the year of withdrawal, unless the individual chooses to report all the income in 2020 (e.g. when income may be significantly reduced).

Plan administrators should note that they can rely on an employee’s certification that he or she qualifies to receive a coronavirus distribution without requiring “proof” or taking additional steps.

Additionally, plan administrators have the ability to refuse these distributions if their current plan does not allow for hardship withdrawals. However, they can also choose to allow the distributions even if their plan documents currently do not allow hardship withdrawals. In the latter case, they have until the last day of the first plan year beginning on or after January 1, 2022 to amend the plan documents to reflect the change regarding hardship withdrawals.

Relief Related to Retirement Plan Loans

  • Increased Loan Amounts – Under normal circumstances, employer retirement plans that permit loans allow participants to borrow up to the lesser of $50,000 or half of the present value of the participant’s vested account balance. Under the Act, qualified individuals in most of these plans can now receive loans in the 180-day period immediately following the Act’s enactment for the lesser of $100,000 or 100% of the present value of the participant’s vested account balance (reduced by other outstanding loans). However, employer plans are not obligated to offer the larger loans permitted by the CARES Act, so plan participants will need to check on the availability of this benefit with their plan sponsor.
  • Deferral of Principal Payments – For qualified individuals who have an outstanding retirement plan loan balance on or after March 27, 2020, which is due on or before December 31, 2020, a one-year extension is granted for repaying the loan.

For these two provisions, “qualified individuals” are defined in the same manner as set forth in the previous section addressing coronavirus-related distributions.  However, unlike in the case of coronavirus distributions, the CARES Act is silent with respect to whether a plan administrator can rely on the employee’s certification regarding eligibility for these expanded loan provisions.

As with so many financial decisions, whether to avail oneself of one or more of these retirement account relief measures depends on the individual’s specific facts and circumstances. Most of the time it is best to leave tax-deferred monies invested for as long as possible, but sometimes (especially in times of difficulty) it may be necessary, or even best, to withdraw sooner rather than later. Borrowing money from a retirement account is often not advisable, but it may be the best solution to a short-term hardship. If you need assistance navigating any of these retirement changes and opportunities, please reach out to your Dean Dorton tax or wealth advisor. We would be pleased to help.

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