The recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act) created temporary provisions affecting two types of taxpayers: those who wish to preserve depressed retirement assets, and those who need emergency liquidity from their retirement assets.
Taxpayers Who Wish to Preserve Depressed Retirement Assets
The CARES Act temporarily waives the existing 2020 required minimum distribution (RMD) requirements for certain qualified plans, such as defined contribution plans under sections 401(k), 403(b) and Section 457(b) and for individual retirement accounts (IRA). If a taxpayer’s initial RMD for calendar year 2019 was deferred to 2020 and not yet taken, the deadline for such distribution has been delayed to 2021.
These provisions allow taxpayers who don’t need cash-flow from their RMDs to allow their retirement accounts to potentially recoup lost economic value while continuing to defer income tax. For taxpayers who already took their RMD, this situation was not addressed in the CARES Act but may be addressed in future guidance.
Taxpayers Who Need Emergency Liquidity
The CARES Act removes the 10 percent early-withdrawal penalty on withdrawals from retirement accounts when made in relation to coronavirus-related financial hardships. These penalty-free distributions are limited to a maximum of $100,000, must be made between January 1 and December 31, 2020, and must be made by someone who:
Is diagnosed with SARS-CoV-2 or coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control (CDC);
Has a spouse or dependent who is similarly diagnosed by such a test; or
Experiences adverse financial consequences because of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of childcare, or by the owner or operator of a business which closes or suffers reduced hours, all because of such virus or disease.
Administrators of retirement plans can rely on the taxpayer’s certification that they meet the conditions in determining whether a distribution is a coronavirus related distribution.
Extended Income Inclusion and Repayment
In general, taxes due on coronavirus-related distributions will be includable in income ratably over three years beginning in tax year 2020. The withdrawn funds may also be re-contributed over a three-year period.
Employers are permitted to amend defined contribution plans to provide for these distributions.
Permitted plan loan amounts are increased to $100,000 for plan loans which are made within 180 days of March 27, 2020. For outstanding qualified plan loan repayments that are due through December 31, 2020, these repayments are delayed for one year.
If you need help determining how these provisions affect you, call on us. In the meantime, please continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the outbreak may affect your tax filing, payments, and planning. We encourage you to share the page with others. Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help.