Taxation - Income, Estate, & Gift
By Eva Stark, JD, LL.M.
The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020. In part two of this two-part article, provisions relating to enhanced access to retirement accounts through coronavirus-related distributions and coronavirus-related loans are covered, as well as recent guidance regarding the suspension of required minimum distributions (RMDs), which were issued since the publication of part one (June 2020).
Enhanced Access to Retirement Accounts
CORONAVIRUS-RELATED DISTRIBUTIONS. Under the CARES Act, a "qualified individual" may be eligible to withdraw up to an aggregate of $100,000 from qualified retirement plans or IRAs without incurring a 10% penalty that would normally apply to such a withdrawal if the individual is under age 59½. Coronavirus-related distributions must be made between January 1, 2020, and December 31, 2020. If the distribution is repaid within three years, it may be treated as a direct trustee-to-trustee transfer, and it may be income tax free. To the extent taxable income is triggered, the income is generally spread out ratably over three years to mitigate the tax burden of the distribution.
For example, if $9,000 is distributed in 2020, it would trigger taxable income of $3,000 in 2020, 2021 and 2022. An election also may be made to include the entire amount in the year of the distribution. Such an election might make sense for those who fall into a lower-than-normal tax bracket in the year of distribution, whether as a result of the coronavirus or otherwise. If tax is paid on a distribution that is fully repaid within three years and that is treated as a trustee-to-trustee transfer, the taxpayer may file amended return(s) and receive a refund of tax paid in the previous year(s).
CORONAVIRUS-RELATED LOANS. Up until September 22, 2020, a "qualified individual" may generally borrow up to $100,000 from his or her qualified plan. This is a change from the lesser of 50% of vested account balance or $50,000 limitation on withdrawals under previous law. Outstanding loan payments that are due between the enactment of the CARES Act and December 31, 2020, may be delayed for one year. If that occurs, any subsequent payment schedule and interest accrual may need to be adjusted.
QUALIFIED INDIVIDUAL. Not every participant or account owner is eligible to take a coronavirus-related distribution or loan. One may be a "qualified individual" if he or she:
- Is diagnosed with SARS-CoV-2 or COVID-19 (or whose spouse or dependent is diagnosed) by a CDC approved test;
- Experiences adverse financial consequences as a result of being quarantined, furloughed, laid off or having worked reduced hours due to COVID-19 (or whose spouse or household member is so affected);
- Experiences adverse financial consequences as a result of being unable to work due to lack of child care due to COVID-19 (or whose spouse or household member is so affected);
- Experiences adverse financial consequences as a result of closing or reducing hours of a business the person owns or operates due to COVID-19 (or whose spouse or household member is so affected); or,
- Experiences other factors determined by the Secretary of the Treasury.
While the original definition of qualified individual did not include individuals whose spouses or household members experienced adverse financial consequences as specified in the CARES Act, Notice 2020-50 expanded the definition. It now defines a member of an individual's household as a person with whom an individual shares a principal residence. In addition, the Notice expanded the definition of qualified individual to specifically include those who experience adverse financial consequences as a result of a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or a start date delayed due to COVID-19.
In the current economic climate, employees considering a coronavirus-related loan may be concerned that their employment might be terminated before they are able to repay the outstanding loan. The Tax Cuts and Jobs Act of 2017 extended the time available to a former employee to repay an outstanding plan loan from 60 days following termination of employment to the due date of the employee's tax return for the tax year, including extensions. Even with the extension, however, successful repayment of a large sum is likely to be challenging.
PROVISIONS OPTIONAL. Coronavirus-related distributions and loans discussed in this section are optional under the CARES Act and not all employer plans may allow them.
It is up to the employer whether, and to what extent, it adopts provisions for such distributions or loans. Individuals interested in these benefits should contact their employer or plan administrator for more information.
In addition, while qualified plans generally allow loans, IRAs do not. As a result, coronavirus-related loans are generally not an option with respect to IRA funds; however, IRA owners may of course obtain coronavirus-related distributions as described above and repay them within three years.
Recent Guidance on Suspension of RMDs
"UNDOING" 2020 RMDs. In Notice 2020-51, the Treasury and IRS extended the rollover period for any RMDs taken at any point in 2020 to August 31, 2020, to allow participants to roll them over into an eligible retirement plan. RMDs from IRAs may also be repaid until August 31, 2020. The Notice states that such repayment is generally not subject to the one-rollover-per-twelve-month-period limitation or the prohibition on rollovers with respect to inherited IRAs.
The Importance of Professional Advice
Individuals who are considering a coronavirus-related loan or distribution or would like to "undo" a 2020 required minimum distribution should explore with their CPA and other advisors whether their specific circumstances might allow them to take advantage of the recent CARES Act provisions.
It also will be important to explore the tax and financial consequences of utilizing these potential options in light of an individual's specific circumstances.
Eva Stark, JD, LL.M.,joined The Nautilus Group® in 2014 to assist with the development of estate and business plans. She also performs advanced tax research. Eva graduated summa cum laude with a BS in economics and finance from The University of Texas at Dallas. She earned her JD, with honors, from Southern Methodist University, where she served as a student attorney and chief counsel at the SMU Federal Taxpayers Clinic. She received her LL.M. in taxation from Georgetown University Law Center. Prior to joining Nautilus, Eva worked in private practice in tax controversy, business law, and litigation.
Joel M. Field III founded Field Financial Strategies, LLC as a boutique financial practice out of an overarching desire to help empower friends and clients to live life to its fullest and confidently pursue their goals, without worry about finances.
As a CERTIFIED FINANCIAL PLANNER™, Joel works extensively with business owners, professionals, entrepreneurs, and executives around the country. Joel's trademarked Financial Empowerment Process℠ is a comprehensive approach to developing a financial strategy that enables clients to work towards their financial goals. Joel is highly qualified to address the needs of clients in the areas of comprehensive financial planning, investment management, retirement planning, estate planning, insurance planning, and business planning.
Joel M. Field III, CFP®, CLU®, LUTCF®
Founder and Financial Planner