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COVID-19 and the CARES Act – New IRS Guidance and Relief for Retirement Plan Distributions and Loans

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On June 19 and 23, 2020, the IRS issued additional guidance (IRS Notices 2020-50 and 2020-51) clarifying and expanding relief for retirement plan participants under the Coronavirus Aid, Relief and Economic Security Act (CARES Act).  A previous article summarizing the CARES Act retirement plan provisions can be found here. The new guidance makes the following changes.

Required minimum distribution (RMD) waiver relief.  The CARES Act waived the RMD requirement for 2020.  Therefore, participants over age 70-1/2 do not have to take RMDs this year.  Participants who have already taken a 2020 RMD have 60 days to roll it over to avoid income tax on the distribution.  The 60-day rollover period has been extended to August 31, 2020.  This change provides taxpayers who have already withdrawn RMDs with more time to return the RMD to the plan or IRA in order to take advantage of this opportunity.

Increased flexibility for plan withdrawals due related to COVID-19.  Retirement plan and IRA participants impacted by COVID-19 may take a coronavirus-related distribution (CRD) of up to $100,000, which will not be subject to automatic 20% federal income tax withholding or the 10% penalty on early distributions before age 59-1/2.  Income tax on the withdrawal can be spread over 3 years.

The new guidance expands the list of individuals qualifying for CRD distributions to include individuals who experience adverse financial consequences as a result of:

  1. A reduction in pay or having a job offer rescinded or start date delayed due to COVID-19.
  2. The individual’s spouse or household member being quarantined, furloughed or laid off; having work hours reduced due to COVID-19; being unable to work due to lack of childcare due to COVID-19; or having a job offer rescinded or start date delayed due to COVID-19.
  3. Having to close or reduce hours of a business owned by the participant’s spouse or member of the participant’s household due to COVID-19.

This expansion responds to calls for relief in situations where the participant’s pay is reduced or a spouse or household member experiences adverse financial events due to COVID-19.

Expanded definition of CRD.  The guidance provides that a CRD withdrawal is not limited to amounts required to meet a specific need arising from COVID-19.  A qualified individual may receive a CRD regardless of whether they have a specific financial need for the distribution, and the CRD may be more than any COVID-19 related financial need.

Plan loan requirements eased.  The CARES Act provides that, for existing plan loans of impacted participants, repayments due in 2020 may be delayed for an additional year.  Because the IRS generally limits plan loan terms to five years and requires level amortization over the loan period, a payment suspension could possibly violate these requirements and trigger a taxable deemed distribution. 

The new guidance provides that following the suspension period, the remaining loan balance may be re-amortized over the original loan period plus one year.  This will not trigger a deemed distribution even if the re-amortized loan period extends beyond the five-year term.

Please contact Vandeventer Black LLP if you have any questions or would like additional information on these issues.

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