INSIGHTFUL INFORMATION SERIES / COVID-19 PANDEMIC
The CARES ACT
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The legislation is a broad- based attempt to deal with the economic impact of the COVID-19 pandemic. This bulletin will discuss portions of the Act which may be of interest to financial professionals.
Penalty free distributions from IRAs and retirement plans in 2020
Corona virus impacted individuals under 591⁄2 can withdraw up to $100,000 from their IRAs or employer plans (or their account balance, if less) without a 10% percent premature distribution penalty.
Employer plans do not have to allow these distributions. If a plan sponsor/employer chooses to allow these distributions, the plan can begin making them immediately, but the plan must be amended to allow for these distributions by the end of 2022. (Governmental plans have until the end of 2024.)
Observation: If an employer does not anticipate laying employees off, or reducing hours, or if the employer does not want employees to be able to permanently reduce the value of their account balances, the employer may choose not to offer this distribution option. As an alternative, the employer may choose to offer increased plan loans, under the rules discussed below.
A coronavirus impacted individual is a person who:
has been infected with the coronavirus;
has a spouse or dependent who has been infected with the coronavirus;
has suffered adverse financial consequences due to the coronavirus. This includes:
being quarantined,
being furloughed, laid off, or having work hours reduced,
being unable to work due to lack of childcare,
closing or reducing hours of a business owned or operated by the individual.
A plan or IRA custodian can rely on the participant’s statement that he or she is a coronavirus impacted individual.
The distribution must be taken between January 2, and December 30, 2020.
This is a distribution, not a loan, and will be taxable unless rolled back into an employer plan or IRA as discussed below.
The $100,000 is an aggregate amount, not a per-plan amount, which means that $100,000 is the maximum a person can withdraw penalty free under this provision, from all plans or IRAs in which the person is a participant.
The $100,000 is a per-individual amount, which means that a married couple can withdraw up to $200,000—assuming each spouse has at least that amount in his/her accounts.
If coming from an employer plan (money-purchase pension, profit sharing, 401(k), 403(b), 457, or ESOP), the distribution will not be subject to 20 percent mandatory withholding.
The amount withdrawn (without increase or decrease for any gains or losses occurring after the distribution) can be rolled back into an IRA or employer plan which will accept it.
The rules for the rollover are:
The distribution, or any part of it, can be rolled back into a plan or IRA. The distribution does not have to go back into the plan it came from.
The rollover must occur in the three-year period beginning on the day after the distribution was received.
Observation: If the distribution is received on May 1, 2020, the three-year rollover period begins on May 2, 2020, and ends on May 2, 2023. It is very important to stress to clients that they should record the date on which the check is received, or the money is moved into a nonqualified account of the client.
The distribution will be included in the recipient’s taxable income in equal amounts in 2020, 2021 and 2022, unless the recipient chooses otherwise. This means the recipient could choose to include the distribution in income in a single year, or two years of the three-year period
Observation: What this really means is that a client who intends to roll over the distribution within the three-year period can elect to pay no tax and have no withholding on the distribution, effectively turning the distribution into an interest- and penalty-free loan to the recipient.
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Insight Investments & Insurance
2120 Northgate Park #203
Chattanooga, TN 37415