The CARES Act passed by Congress on March 27, 2020 is a monster of a bill at 895 pages long. Law makers, lobbyists, lawyers, accountants, and media pundits will be examining, learning, reporting and debating all its provisions for the weeks and months to come.
This article is intended to focus in on relief for those with pension plans and IRAs. The following is an abbreviated list of the benefits in the CARES Act for these types of account holders, which will be discussed in greater detail below.
- Required Minimum Distributions (RMD) have been suspended for 2020.
- Planning Opportunities for IRA to Roth Conversion.
- Penalty Free Distributions of up to $100,000 from Retirement Plans.
- Temporary Increases in Plan Loan Limits.
- Delay in Plan Loan Repayments for One Year.
Contact us at (619) 696-0520 or fill out the form to the right for any questions you might have regarding these changes.
Required Minimum Distributions (RMDs) Have Been Suspended for 2020
If you are a Participant in defined contribution plan, such as a profit-sharing plan or 401(k) plan, or you own an IRA, neither you nor your beneficiaries will be required to take RMDs in 2020.
The RMDs will start up again in 2021, but the untaken 2020 RMDs do not have to be made up. No RMDs for 2020 are required from 403(b) plans and 457(b) plans sponsored by governmental entities either. However, RMDs will still be required from defined benefit plans (traditional pension plans).
The purpose of this provision is to avoid forcing individuals to sell stocks being held by the plans or IRAs at a low value in order to pay out an inflated RMD calculated on the account balance as it stood on December 31, 2019.
Planning Opportunity for IRA to ROTH Conversion:
Individuals who do not need their RMDs should consider converting some of their traditional IRA to a Roth IRA as they will not be bringing their RMD into their taxable income. Income is determined at the time of conversion. An in-kind conversion from a traditional IRA to a Roth IRA of depressed stocks will give rise to a larger value Roth when the market turns around.
Roth IRAs are more advantageous than a regular IRA because once the Roth owner turns 59 ½ and the Roth IRA has been in existence for 5 years, all the funds coming out of the Roth, including income, come out tax free.
Penalty Free Distribution of up to $100,000 from Retirement Plans:
Plan participants, including spouses and dependents, who have been diagnosed with COVID-19, or who have suffered financial consequences directly because of the coronavirus, can receive a distribution of up to $100,000 from their plan. Qualifying distributions are exempt from the 10% early withdrawal penalty which generally applies to distributions taken before age 59 1/2. Qualifying distributions can be repaid over 3 years, or if not repaid, can be taken into income over a 3-year period. From a compliance standpoint, employer can rely upon self-certification by the participant that the conditions for eligibility of this distribution exist. Meaning that if the employee says they meet the condition, the employer doesn’t have to investigate or verify. If you are an employee in need of this relief, requesting it early and identifying your qualification as soon as possible will be helpful.
Unfortunately, more guidance by IRS will be needed – for instance, it is not clear whether retirement plans are required to make these COVID-19 distributions available or if this provision is simply an option. Under federal law, the plan document governs what is authorized in most cases. Another question is whether interest will be imposed on repayment and at what rate. What qualifies as a “financial consequence” or “directly because of the coronavirus” – can it simply be getting laid off or furloughed, or does it have to be something more? It is also not clear how fast the major brokerage house and major retirement plan platforms are going to be able to implement this new provision.
Increase (Doubling) in Plan Loan Limits
Plan participants, including spouses and dependents, who have been diagnosed with COVID-19, or who have suffered financial consequences directly because of the coronavirus, within 180 days after enactment of the CARES Act, can take a plan loan up to $100,000 or their vested account balance in the plan, whichever is less. This is an increase from the general limits on plan loans which are the lesser of $50,000 or 50% of the vested account balance (note a plan is not required to offer plan loans and some plans provide for loans up to $10,000 regardless of the vested account balance).
It is not clear whether this is an optional provision that employers can choose to adopt or whether it suspends the traditional rules or the plan document. Also, it is not clear how soon the plan providers can implement it. If the plan allows for loans, this provision should be fairly easy for the employers to implement. If the plan doesn’t and the plan must be amended to include that language – it is probably a project that those employer’s will not bother with. Either way, you should inquire if this is important to you.
Delay in Plan Loan Repayments for Up to One Year
The CARES Act postpones for one year any loan repayment that is due after the Act’s enactment and before December 31, 2020. The IRS will need to provide guidance on whether a plan participant will be forced to delay repayment even if the participant wants to continue to pay the loan. Similarly, they will need to determine whether interest will continue to accrue on the unpaid loan balance, and whether the rate will be the stated rate of the loan or a different rate (reduced rate).
Pension plans and IRAs are complicated in normal circumstances. These changes create another layer of complexity, but they also provide opportunities for those who could benefit from or who really need this specific assistance. If you have any questions, please don’t hesitate to call.