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The Coronavirus Aid, Relief and Economic Security (CARES) Act, which became law on March 27, 2020, includes a number of provisions to help ease the financial burden faced by retirees and savers due to the global pandemic. The CARES Act makes it easier for people to access their retirement savings. The Act includes distribution, loan and RMD waiver provisions.

Section I: Qualifying for a CARES Act Distribution or Loan or RMD Waiver

In order to qualify for the coronavirus-related distribution and loan provisions you must meet one or more of the following conditions:

  • You have been diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a CDC-approved test OR
  • You have a spouse or dependent (as defined for federal income tax purposes) who has been diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a CDC-approved test OR
  • You, your spouse, or a member of your household (defined as someone who shares your principal residence) have experienced adverse financial consequences as a result of:
    • being quarantined,
    • being furloughed or laid off or having your work hours reduced due to such virus or disease,
    • being unable to work due to lack of childcare due to such virus or disease
    • closing or reducing hours of a business owned or operated by you due to such virus or disease.
    • having pay or self-employment income reduced due to such virus or disease, or
    • having a job offer rescinded or start date for a job delayed due to such virus or disease

More information can be found in Sections II and III below.

 

The RMD waiver does not require the that you meet one of the above conditions.  IRA owners may call our Client Care Center at 1-800-448-2542 to request the waiver.  For plan participants, the plan sponsor must also have elected to permit the RMD waiver.  More information can be found in Section IV below.

 

Section II: Coronavirus-related Distributions

Many plans currently have provisions allowing you to take either a loan or other in-service withdrawals including hardship distributions.  Check your plan’s distribution and loan rules to determine if you are eligible for one of these options currently.

If you meet one of the coronavirus-related distribution qualification conditions, then any distributions you take from your qualifying employer-sponsored plans or IRAs from January 1, 2020, through December 30, 2020, can be treated as CRDs.

If your employer sponsors a 401(a) or (k) plan, 403(b) plan or governmental 457(b) plan, and you are already eligible for a plan distribution, such as an in-service distribution or termination of employment distribution, you can treat the distribution as a CRD.  In that case, no employer action should be necessary. Additionally, your employer may add a new coronavirus-related distribution event to the plan.

Yes. The aggregate limit for CRDs across all of your qualifying employer-sponsored plans and IRAs is $100,000.

Yes. You can take multiple distributions treated as CRDs, up to the aggregate $100,000 limit.

A CRD can have one or more of the following benefits for you:

  • For your plan account(s), the distribution is not subject to the 20% mandatory federal income tax withholding (it may still be subject to state tax withholding though).
  • For early distributions (generally, prior to age 59 ½), the distribution is not subject to the 10% early withdrawal tax penalty.
  • Although all of the distributions will be reported on a 2020 IRS Form 1099-R, you have the choice to include the CRDs in your 2020 taxable income or in equal amounts in income over 3 years (2020-2022)
  • You can also repay all or part of the distribution(s) to an eligible retirement plan that accepts rollovers or to an IRA within 3 years of the distribution date.

If you are not currently eligible for a plan distribution, your plan sponsor will need to adopt the new CRD plan distribution event for you to take a CRD distribution. We are working with plan sponsors to determine which options will be implemented for your specific plan. You can always contact your financial professional or the Client Care Center at 1-800-448-2542 for assistance.

Yes. Only distributions that are taken from January 1, 2020, through December 30, 2020, can qualify as CRDs.

Yes. Although all of the distributions will be reported on a 2020 IRS Form 1099-R, you have the choice to include the CRDs in 2020 taxable income or in equal amounts in income over 3 years (2020-2022).

In addition, you can repay all or part of the distribution to your retirement plan if it accepts rollovers or to another eligible employer plan that accepts rollovers or to an IRA within 3 years of the distribution date.

 

Section III: Coronavirus-related Loans

The CARES Act provides an increased loan limit and loan repayment deferral for retirement plans that allow loans. Both provisions require adoption by your employer and you must meet one of the coronavirus-related qualification conditions.

If your plan allows loans, you can request a loan under the plan’s current loan provisions. To take advantage of the increased loan limit and/or the loan repayment deferral provided in the CARES Act, you must meet one of the coronavirus-related qualification conditions and your employer will have to adopt these provisions.

The CARES Act provides for a loan limit of the lesser of $100,000 or 100% of your vested account balance.

Maybe. First, your employer must adopt the increased loan limit and you would need to meet one of the coronavirus-related qualification conditions.  Then, because the CARES Act only changed the loan limit, your eligibility for a loan will still be subject to any other Internal Revenue Code rules (e.g., the applicable dollar limit is reduced by the highest outstanding loan balance in the last 12 months) or employer plan rules (e.g., some plans only allow one loan outstanding at a time).

Yes. The increased loan limit will apply for loans made through September 22, 2020.

 

If you default on a loan, regardless of reason for default, then the outstanding loan amount will be reported as a deemed distribution in the year of default and as taxable income for that year, and could be subject to the 10% early withdrawal tax penalty.

If you meet one of the coronavirus-related distribution conditions, and your employer adopts the loan repayment deferral provision, then:

  • If you have an outstanding loan in good standing with a payment due date after March 27, 2020, you can defer repayments from that due date and remaining repayments due through December 31, 2020.
  • If you take out a new loan on or after March 27, 2020, then you can defer repayments due during 2020.
  • Loan repayments will resume in January 2021, and the loan (including interest accrued during the deferral period) will be re-amortized over a period that is 1 year longer than the original term of the loan.

If you meet one of the coronavirus-related distribution conditions, and your employer adopts the loan repayment deferral provision, then:

  • If you have an outstanding loan in good standing with a payment due date after March 27, 2020, you can defer repayments from that due date and remaining repayments due through December 31, 2020.
  • Loan repayments will resume in January 2021, and the loan (including interest accrued during the deferral period) will be re-amortized over a period that is 1 year longer than the original term of the loan.

All loan payments due prior to March 27, 2020, must be paid in order to avoid default.

Section IV: Required Minimum Distributions

The CARES Act provides a temporary RMD waiver. However, even with that waiver, your employer’s plan may still require the distributions. As a result, if you are a participant in an employer-sponsored retirement plan, your plan sponsor will need to adopt the RMD waiver before they are waived for 2020 under your plan.

 

Regardless whether your employer adopts the CARES Act RMD waiver for the plan, under the CARES Act, any RMD payments taken in 2020 may be eligible to be rolled over to an employer-sponsored retirement plan that accepts rollovers or to an IRA, generally within 60 days of the date of the distribution. The IRS has recently issued guidance providing limited relief extending the 60-day indirect rollover period for 2020 RMD distributions to the later of August 31, 2020, or 60 days from the distribution date.

 

If you are an IRA owner (including beneficiary IRAs paid out over life expectancy or a 5-year period), your RMD can be waived immediately upon your request.

This is a true suspension, so waived 2020 RMDs will not be required to be paid.

Call our Client Care Center at 1-800-448-2542 for assistance to suspend your RMD payments for 2020. You may want to speak with your financial professional to discuss your options.

If you are an IRA owner or your employer has adopted the RMD waiver and you received a payment on or after January 1, 2020, it will be treated as a regular distribution from the plan and may be rolled over to an IRA or retirement plan that will accept the rollover generally within 60 days of the date of the distribution.  The IRS has recently issued guidance providing limited relief extending the 60-day indirect rollover period for 2020 RMD distributions to the later of August 31, 2020 or 60 days from the distribution date.

If your RMD was due April 1, 2020 and was paid on or after January 1, 2020, then it will be treated as a regular distribution from the plan or IRA.  While the distribution cannot be “undone” or “reinstated in your account,” the distribution may be rolled over to an IRA or retirement plan that will accept the rollover generally within 60 days of the date of the distribution.  The IRS has recently issued guidance providing limited relief extending the 60-day indirect rollover period for 2020 RMD distributions to the later of August 31, 2020 or 60 days from the distribution date.

 

If you have additional questions or need assistance, please contact your financial professional or call our Client Care Center at 1-800-448-2542.

*Please note that this is intended to be informational only, and is not intended as legal, tax or other advice to you.  You should consult your tax advisor with respect to your personal tax matters, including any that may arise out of the CARES Act provisions.