Coronavirus Relief Part III - RMD Waivers

This article is Part III of a series on coronavirus relief offered by the CARES Act. For information on coronavirus-related distributions, see Part I, and for plan loans, see Part II.

Minimum Distribution Requirements

Anyone who was at least age 70½ during 2019 would generally be required to receive a required minimum distribution (RMD) from their IRA or retirement plan during 2020. This age was raised to 72 for individuals who attained age 70½ during 2020 or later, and the requirement is waived in general for individuals who have not yet retired and who are not 5% owners with respect to employer-sponsored retirement plans (other than SEP-IRAs).

For participants whose first RMD was due for the 2019 calendar year, that is, individuals who turned age 70½ in 2019 and who were either 5% owners or retired, or who were already over age 70½ but only retired during 2019, their required beginning date was April 1, 2020. For others who had previously commenced RMDs, they are required to receive an RMD no later than December 31 of each year.

For defined contribution plans (including 401(k) plans and profit sharing plans) and IRAs, the amount of the RMD is calculated by taking the account balance at the end of the prior calendar year and dividing it by a life expectancy factor. The effect of this is that the 2020 RMD is based on the account balance as of December 31, 2019. However, many individuals’ account balances have declined significantly since the beginning of the year. As a result the 2020 RMD amount would now represent a disproportionately larger portion of their account.

Requirements Waived

Section 2203 of the CARES Act waives all RMDs with due dates during 2020 with respect to defined contribution plans and IRAs. Unlike the distribution and loan provisions of section 2202, there is no requirement that an individual be a qualified individual in order to receive this relief - it is available to everyone.

Note that RMDs from defined benefit plans (including cash balance plans) are not affected by this section.

For individuals whose first RMD was due on April 1, 2020, they now do not need to receive an RMD until 2021, whereas without this relief they would have needed to take 2 RMDs during the 2020 calendar year. If they already took their first RMD during calendar year 2019, there is no relief for that RMD, however they do still receive relief with regard to the RMD which would have been due by December 31, 2020.

Eligible for Rollover

For individuals who have already taken a 2020 RMD, that payment is now eligible for rollover. The amount withdrawn may be rolled over to a qualified plan or IRA within 60 days.

Plan Operations

Most qualified plans will contain language requiring that RMDs are made every year once participants reach their required beginning date. Although there is no longer a required distribution for 2020 under the CARES Act, a plan must always be operated in accordance with its written plan document. Therefore if a plan sponsor does not wish to make distributions to participants who are past their required beginning dates in 2020, they must adopt a plan amendment. The due date to adopt the amendment is December 31, 2022 for calendar year plans.

Please don’t hesitate to contact us if you have any questions about how the minimum distribution requirements will affect you or your plan participants in 2020.

Part IV of this series will discuss issues affecting defined benefit plans.

Coronavirus Relief Part II - Loans

This article is Part II of a series on coronavirus relief offered by the CARES Act, and focuses on plan loans. For information about coronavirus-related distributions, see Part I.

Section 2202(b) of the CARES Act adds increased availability of, and flexibility for, participant loans from qualified plans. Normally, IRC section 72(p) limits the amount of a loan to the lesser of $50,000, or 50% of a participant’s vested account balance, and requires that the loan be fully repaid within 5 years. Both of these limitations are relaxed by CARES.

Increased Limits

The maximum amount of a loan is increased to the lesser of $100,000, or 100% of a participant’s vested account balance. This only applies if both a) the participant is a qualified individual (see Part I for the definition of a qualified individual), and b) if the loan is made no later than September 23, 2020.

All other rules around the calculation of the maximum loan amount still apply. For example, the $100,000 is still reduced by the highest outstanding balance of all loans during the past year.

Delay of Repayments

For a qualified individual with an outstanding loan, any payment due between March 27, 2020 and December 31, 2020 is delayed by 1 year. Interest continues to accrue during this time. Any future payments after this period must be adjusted to reflect the delay and the additional interest. This delay may cause the overall term of the loan to extend beyond 5 years.

This applies to both loans which were already outstanding, and new loans made no later than December 31. This means that a new loan may be made with an overall term of 6 years, where the first payment is due in 1 year. Again this is only available to qualified individuals.

Plan Operations

An increase to the $100,000/100% limits is optional. If the plan sponsor wishes to provide the increased limits to qualified individuals, the loan program must be amended to allow for the increased limits. This amendment must be adopted retroactively no later than December 31, 2022 for calendar year plans. If the plan does not currently have a loan program, the plan must first be amended to allow loans. That amendment must be adopted before any loans may be made.

Many plans’ loan programs state that loan repayments will be made via payroll deduction. This helps keep the loan up-to-date while also making the process easy for participants. However in this environment where many participants are not currently receiving regular paychecks, or their pay may be much less than normal, sponsors may wish to consider making alternative payment options available. Participants may be permitted to make their loan payments via personal check or other arrangements. If this option is elected, the sponsor should be certain to amend their loan program, if necessary. The sponsor may also wish to allow terminated former participants to take loans. If so, the plan’s loan program should reflect that.

Plan sponsors should carefully consider the impacts of allowing increased loan limits before making any changes. While it is an easy way to get more money into participants’ hands at this difficult time, there can be serious consequences if the loan is not later repaid. This is especially true in pooled-account plans, where the loan is not just part of that one participant’s account, but is a general asset of the plan. If the plan allows for a loan equal to 100% of the participant’s account balance, and the participant later defaults on the loan, then it is possible that even a complete foreclosure of the participant’s account balance will be insufficient to repay the plan.

As always, please reach out to us if you want to discuss how these changes might impact your plan, or if you have any questions about your specific situation.

Part III, covering changes to the required minimum distribution requirements, will be coming soon!

Coronavirus Relief Part I - Coronavirus-Related Distributions

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020. This law added several provisions which affect retirement plan participants and plan sponsors. In this article, we will examine the new coronavirus-related distributions. In future articles, we will look at the increased limits for participant loans, waivers of 2020 RMDs, and some features affecting sponsors of defined benefit plans.

Section 2202(a) of the new law permits what is known as a “coronavirus-related distribution.” This has some similarities to existing hardship withdrawals, but is best understood as an entirely new type of distribution.

Requirements

A distribution must meet all of the following requirements to be considered a coronavirus-related distribution:

1. It must be made between January 1, 2020 and December 30, 2020;

2. It must be made from an eligible retirement plan or IRA;

3. It must be made to a qualified individual; and

4. It must not exceed the aggregate limit.

Eligible plans

Plans eligible to make coronavirus-related distributions are:

• Qualified plans, including all 401(k) and profit sharing plans,

• 403(b) plans,

• IRAs,

• Individual retirement annuities,

• Section 403(a) annuity plans, and

• Governmental 457(b) plans

Qualified individuals

The law defines a qualified individual as as an individual:

1. who is diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention,

2. whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or

3. who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).

In other words, you are a qualified individual if:

• You, your spouse, or dependent have tested positive for coronavirus, or have been diagnosed with COVID-19, or

• You have experienced adverse financial consequences as a result of any of the following:

  • Being quarantined

  • Being furloughed or laid off, or having your work hours reduced due to coronavirus/COVID-19

  • Being unable to work because you are unable to obtain child care as a result of coronavirus/COVID-19

  • You are the owner or operator of a business which has closed or has reduced hours as a result of coronavirus/COVID-19

The law also allows for the IRS to make other situations available for coronavirus-related distributions. As of this date, no other qualifying factors have been announced.

The law explicitly allows for plan sponsors to rely on the participant’s certification that they are an eligible individual under the above definition. This means that it is not necessary for sponsors to collect substantiating documentation from participants.

Aggregate limit

The maximum amount of a coronavirus-related distribution is $100,000. This is determined on the basis of all coronavirus-related distributions taken by the participant during the calendar year, including those from IRAs. A plan sponsor is not responsible for taking into account any distributions which a participant may have taken from other plans or from IRAs, as long as the sponsor limits the total coronavirus-related distributions taken by the participant during the calendar year to $100,000 across all plans maintained by the sponsor and any member of its controlled group.

Exempt from excise tax

A coronavirus-related distribution is exempt from the excise tax under IRC sec. 72(t). This is the 10% penalty tax that normally applies to any distribution taken from a qualified plan or IRA prior to age 59½.

Distribution may be repaid

Coronavirus-related distributions may be repaid to the plan. The repayment must be made within 3 years after taking the distribution, and may be made in multiple installments, or all at once. The repayment can be made to any IRA or qualified plan to which the participant is eligible to make a rollover contribution. For tax purposes, the repayment will be treated as if it were a rollover contribution made within 60 days.

Income may be recognized over 3-year period

Coronavirus-related distributions are spread out over a 3-year period for income tax purposes. This treatment may be waived, if desired.

Plan operations

Plans may, but are not required to, allow for coronavirus-related distributions in addition to other types of in-service or post-severance distributions, and in the absence of another distributable event. If a plan allows coronavirus-related distributions, it may do so immediately, but it must then be amended retroactively no later than December 31, 2022 for calendar year plans.

Even if the plan does not allow for coronavirus-related distributions, if a qualified individual (as defined above) is eligible for another type of distribution under the plan, they may still be able to take advantage of the tax benefits associated with coronavirus-related distributions.

This is a highlight of the important provisions and considerations around coronavirus-related distributions, as added by the CARES Act. We expect that there will be specific questions which may not be answered by this article. If you have any questions, please reach out to us.

Look for Part II of the Coronavirus Relief series, coming soon!

SECURE Act Signed into Law

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. There are numerous changes that affect qualified retirement plans.

A brief summary of the new rules can be found at:

https://www.asppa.org/news/browse-topics/secure-act-signed-law

Most of the changes are very positive for plan sponsors and participants, including:

• Larger tax credits for new plans,

• Simplified rules for safe harbor plans,

• An increase in the Required Beginning Date for certain distributions from age 70½ to 72, and

• Additional time to adopt a new plan.

Some of the changes were designed as “revenue raisers” to offset the cost of the liberalization of other provisions. These are not so positive. They include the end of the “stretch IRA” and sharply increased penalties for late filing of certain pension-related forms. A summary of the increase in filing penalties can be found at:

https://www.asppa.org/news/browse-topics/instant-analysis-big-increase-penalties-late-plan-returns-notices

Please don’t hesitate to contact us if you have any questions or are curious about how these changes may affect your plan.