Highlights of the CARES Act

The "Coronavirus Aid, Relief, and Economic Security Act" of 2020

In response to the economic damage caused by the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES ACT") on March 27, 2020. With respect to qualified plans and IRAs, Congress added flexibility with respect to distributions from plans and suspended required minimum distributions for 2020. For qualified plans Congress increased potential loan availability and lengthened repayment periods for plan loans.

A.   Suspension of Required Minimum Distributions for 2020

Section 2203 of the CARES ACT, as amplified by the IRS guidance provided in Notice 2020-51, generally provides that:

1. 2020 required minimum distributions ("RMDs") are suspended. Also suspended are 2019 RMDs that were not taken prior to January 1, 2020 and were required to be taken by April 1,2020 by the participant. The suspension of RMDs for 2020 applies to beneficiary or "inherited plans" just as it applies to participants who would have been required to take an RMD in 2020.
2. Persons who received RMDs for 2020 will have until August 31, 2020 to "rollover" the distributions back into a qualified plan or IRA.

B.   Tax Favored Withdrawals from Retirement Plans.

Section 2202(a) of the CARES ACT, as amplified in IRS guidance provided in Notice 2020-50, generally provides that plan participants who are economically impacted by the COVID-19 pandemic may withdraw up to $100,000 from a qualified plan or IRA between January 1, 2020 and December 31, 2020) and spread the income tax on the withdrawal ratably over three taxable years (2020, 2021 and 2022). Further, the participant can recontribute the distribution into a qualified plan or IRA within three years, and the withdrawal and recontribution will be treated as a tax free rollover that does not count against the "one 60 day rollover per 12 month period" rule. In addition, the 10% early withdrawal penalty will not apply to the COVID-19 distribution, and the 20% withholding requirement for distributions from qualified plans does not apply.

But you do have to have access to distributions in the first place. For IRA owners, this shouldn't be a problem. For employer sponsored plans, there may be difficulties in accessing distributions, especially for employees who are still working, depending upon the type of plan and how the plan is drafted. For employer sponsored plans, you must check to determine if you are eligible for distributions under your plan.

Note that you still have to pay income taxes on the distribution. If you qualify for the COVID-19 distribution, you must either include the distribution in your income over a three year period in equal installments and pay your income taxes, or you can elect to include all of the distribution in 2020 and pay your income taxes on the distribution in the first year.

Also note that if you choose to recontribute some or all of the COVID-19 distribution after the due date, including extensions, for your income tax return in any of the three taxable years, then the recontribution is only treated as rollover in the year of recontribution. If the late recontribution exceeds the ratable COVID-19 inclusion for the year, then you have the option of carrying the excess back to the prior year by amending your prior year return and requesting a refund of income taxes, or you can carry forward the excess into the next year if you are still within the three year period.

For example, if you took a $75,000 COVID-19 distribution in 2020 and included it ratable in your taxable income for 2020, 2021 and 2022 at $25,000 per year, and repaid $30,000 in 2021 after the due date for your 2020 tax return (including extensions, if taken), then you would have no COVID-19 distribution included in your 2021 income tax return ($30,000 is greater than $25,000), and you would have $5,000 that you could carry back to your 2020 amended tax return or carry forward to your 2021 tax return to be used as a reduction in your COVID-19 distribution income for either of those years.

The recontribution rules do not apply to inherited IRAs or inherited plans because distributions from inherited plans can not be rolled over once distributed.

If recontributed with the three year window, the recontributions is to be treated as a, "direct trustee to trustee transfer within 60 days of the distribution." As such, the recontribution does not appear to impact the "one 60 day rollover per 12 month period" rule. Recontributions are reported on Form 8915-E.

Not everyone can benefit from $100,000 distribution rule. The persons who can benefit from a "Coronavirus-Related Distribution" must fall into any one of these categories:

1. who is diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention,
2. whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or
3. who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).
4. (IV) As provided in Notice 2020-50, an individual who experiences adverse financial consequences as a result of:

• the individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
• the individual's spouse or a member of the individual's household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
• closing or reducing hours of a business owned or operated by the individual's spouse or a member of the individual's household due to COVID-19.

Should you take a COVID-19 Distribution if you qualify for it? First consider the impact of the distribution on your financial plan.

The intent of the CARES ACT is to provide some relief for people who have been negatively impacted by the pandemic. Should you take out the distribution if you don't need it and use the funds to buy stock and sell covered calls, or lend the funds to a family member to buy a house, or to contribute money to a business venture that will pay you back within three years? Well, the CARES Act doesn't state that the prohibited transaction rules of IRC 4975 are lifted for these expanded "60 day rollovers", so probably not. Should you use the distribution to fund a Roth conversion just to spread the income out over three years—probably not advisable.

C.   Loans from Qualified Plans

Section 2202(b) the CARES ACT increase loan amounts from qualified plans to the lesser of $100,000 or 100% of the participant's account balance from March 27, 2020 to September 22, 2020. The usual limit is the lesser of $50,000 or half of the participant's account balance. The repayment period for certain loans in 2020 loans was also increased by one year. A participant is eligible for the enhanced loan limits if the participant meets the definition of a person who is qualified to receive a "Coronavirus-Related Distribution", above. Check with you plan provider to determine if this loan option is available with your plan, and always consider the impact of the loan on your financial plan.