The CARES Act of March 2020 and its Impact on Retirement Plan Distributions

The American College of Financial Services
April 21, 2020

Prepared By:  

Arthur Prunier Jr, PhD, RICP®

Instructional Assistant – RICP® program, The American College of Financial Services

In response to the widening coronavirus health crisis in the U.S., Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. This was signed into law on March 27, 2020. For purposes of the three Retirement Income Certified Professional® (RICP®) designation courses, the most important sections of this act are those that deal with required minimum distributions and retirement plan distributions. These new provisions are mainly in effect during 2020.

Provisions Dealing with Required Minimum Distributions (RMDs)

In brief:

  • All RMDs are waived for 2020

  • This applies to both original plan/account owners as well as beneficiaries

  • Also applies to 2019 “first year” RMDs (Required Beginning Date of April 1, 2020) that hadn't been taken by January 1, 2020

  • Applies to qualified plans, 403(a), 403(b), gov't 457(b) and IRAs, including annuities contained therein that aren’t yet in payout status

  • Does not apply to RMDs for inherited, non-qualified annuities

  • This waiver will not impact the rules for determining Required Beginning Dates, as they were modified by the SECURE Act of Dec. 2019

  • Certain RMDs follow a Five-Year Rule. 2020 will now not be counted in determining the ending year for those periods

These provisions primarily provide relief from RMD-forced sales of plan/account holdings during the current COVID-19-induced bear market environment.

A very similar RMD waiver to that contained within CARES was included in the Worker, Retiree, and Employer Recovery Act of 2008 and was applied to RMDs for 2009. Examining previous IRS guidance issued for that 2009 RMD waiver (for example, IRS Notice 2009-82) may supply insights into how the IRS will handle technical aspects of the current waiver.

Provisions Dealing with Coronavirus-Related Plan Distributions

In brief:

  • For 2020 only, CARES creates a special category of plan/account distribution, the “coronavirus-related” distribution

  • The section 72(t) 10% penalty tax is waived for coronavirus-related distributions. For other types of distributions, the usual rules apply

  • Income taxation of coronavirus-related plan distributions is modified

  • Repayment of coronavirus-related plan distributions is allowed for up to three years

Clearly the definition of a "coronavirus-related" distribution is very important. Here are the key points:

  • The distribution must be made to an individual who personally had a COVID-19 diagnosis, whose immediate family member had a COVID-19 diagnosis, or who experiences employment disruptions directly or indirectly related to the coronavirus

  • The employee will self-certify that the distribution is coronavirus-related

  • The distribution must be made from a qualified plan, 403(a) plan, 403(b) plan, gov't 457(b) plan, or IRA

  • The distribution must occur on or after Jan. 1, 2020 but before Dec. 31, 2020

  • The aggregate amount of all distributions must not exceed $100,000

Coronavirus-related plan/account distributions are still subject to income taxes.  But the recipient can chose one of two ways to pay the tax:

  • Pay ratably over three tax years, which includes the 2020 tax year

  • Pay all of the income tax in 2020

In an apparent effort to encourage replenishment of retirement savings, repayment of coronavirus-related plan distributions is allowed. Recipients can repay a coronavirus-related distribution within three years in one or more contributions. The text of the CARES Act contains no discussion of how such repayments will affect the income taxes due or taxes already paid because of the original distribution. Presumably regulations will need to be passed to specify how such repayments will be incorporated into future personal income tax calculations.

Provisions Dealing with Qualified Plan Loans

In brief:

  • There is a temporary increase of qualified plan loan limits and a delay of the required repayment

  • No requirement for the loan to be coronavirus-related

  • Only applies to loans taken within 180 days of March 27, 2020

  • No more than $100,000 can be borrowed (normal limit is $50,000)

  • All of the nonforfeitable accrued plan benefit can be borrowed

  • Any pre-existing plan loan that would have come due between Mar. 27 and Dec. 31, 2020 will have its due date extended by one year

Additional Reading

Jeffrey Levine, CPA/PFS, CFP, CWS, MSA, has written a detailed article that covers the details of the CARES Act from the perspective of the financial services industry.  Here is a link to his article: Analyzing The CARES Act: From Rebate Checks To Small Business Relief For The Coronavirus Pandemic.

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