Retirement Plan Changes Under the CARES Act

April 21, 2020
Wealth Planning Associate Sara Turner discusses the implications of the CARES Act on certain rules regarding retirement plans.

Designed to support individuals, businesses and critical industries during the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) seeks to provide stability and continued growth through a variety of tax incentives. For individuals, perhaps the most notable portion of the legislation pertains to revisions to rules regarding retirement accounts. Of the various changes made, clients of Brown Brothers Harriman (BBH) may find noticeable value in the flexibility afforded by required minimum distribution (RMD) deferrals this year. While clients likely have many other options before resorting to those outlined below, the RMD waiver can provide a unique planning opportunity in the form of one-time tax relief.

Temporary Changes to Required Minimum Distributions

One of the most notable changes generated by the CARES Act in the retirement plan realm was the suspension of all RMDs for 2020. In brief, the act made the following modifications to required distributions from retirement plans:

  • RMDs are waived for all retirement accounts, including traditional IRAs, inherited IRAs, SEP IRAs, SIMPLE IRAs and employer plans (for example, 401(k), 403(b), 457(b), and so forth).
  • The RMD waiver also applies to individuals who would have taken their first RMD in 2020. For example, if you turned 70½ in 2019 and delayed taking your first RMD until April 1, 2020, you now get to delay two years’ worth of RMDs (2019 and 2020).
  • If an individual took their RMD prior to this rule coming into effect, they can deposit (rollover) the funds back into the account with no tax consequences.
    • In order to do this, the distribution must have been made within the last 60 days. Importantly, only an account owner or surviving spouse can complete a rollover for this purpose; the rollover capability does not apply to inherited IRA RMDs or RMDs already distributed to non-spouse beneficiaries.
    • A rollover of this nature should be carefully considered with counsel from your tax advisor to ensure that it does not violate the rule allowing only one rollover in any 12-month period.
  • Should the 2020 RMD be taken anyway if funds are not needed? In general, unless an individual is in a lower tax bracket in 2020 than they will be in the future, a 2020 RMD should not be taken, as it allows these funds to remain in the retirement account longer, growing tax-deferred. Individuals in a lower tax bracket in 2020 than they may be in the future should discuss a possible Roth IRA conversion with their BBH relationship manager.

Greater Ability to Access Funds in Retirement Accounts 

Characterized as a “coronavirus-related distribution,” the CARES Act provides for a specialized distribution from retirement accounts at any point in 2020 (January 1 through December 31). In order to qualify for this type of distribution, the individual must have been “impacted” by COVID-19. Meeting this requirement includes being personally diagnosed with the virus or having a dependent or spouse who has been diagnosed; experiencing a variety of negative economic consequences related to COVID-19, such as reduced hours, lack of childcare and business closures; and “other factors” deemed acceptable by the Secretary of the Treasury. In qualifying instances, the following parameters apply:

  • Distributions may total up to $100,000 in aggregate from eligible plans, including IRAs, 401(k)s and qualified deferred compensation plans.
  • For those individuals under the age of 59½, distributions under this provision are exempt from the 10% early withdrawal penalty typically applied to “early” distributions.
  • If a distribution is made from an employer plan, funds distributed are not subject to the 20% mandatory federal withholding required in most instances.
  • Any funds distributed are still considered taxable income, though the income can be spread over three tax years beginning in 2020. While the three-year spread is the default for taxing any distributions, it is important to note that an individual can elect out of this tax treatment. For those taking a distribution and where 2020 is a low-income year, electing to tax all income in 2020 may be an optimal tax planning strategy.
  • In addition to spreading out income taxes, individuals can opt to repay coronavirus-related distributions over a similar three-year period. In this case, “repay” essentially means depositing some of or all the withdrawn funds back into the retirement account to offset the total tax liability. The repayment period begins the day after the distribution is received. Any repaid amounts can be recontributed in one or more payments and do not count against maximum contribution limits in the year deposited.

Changes to Loans from Employer Plans

Additional flexibility with respect to loans from employer plans has been provided through the remainder of the year. If able to demonstrate an aforementioned hardship resulting from COVID-19, individuals may work with their plan administrator based on the following:

  • The maximum loan amount available from an employer plan has been increased from $50,000 to $100,000.
  • Limits on the amount of a participant’s vested balance that may be used for loan purposes are lifted, so that 100% of a vested plan balance may be accessed.
  • Individuals utilizing the loan option in any amount can also take advantage of loan repayment deferral. Payments that would have been owed on the plan loan between the date of the CARES Act enactment (March 27, 2020) and the end of 2020 may be delayed for up to one year.

Additional Items

Other items of note that the CARES Act addresses:

  • The deadline to make IRA contributions for the 2019 tax year has been extended from April 15 to July 15.
  • The five-year distribution requirement for non-designated beneficiaries (estates, charities and certain types of trusts) who inherited a retirement account where the owner died prior to reaching the required beginning date for RMDs has been extended to six years. The gain in one additional distribution year applies to beneficiaries in this category who inherited an account between 2015 and 2019.

Please reach out to your BBH relationship team if you have any questions about the impact of the CARES Act on your retirement plan.

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