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04.03.2020 | Legal Advisory

The Coronavirus Aid, Relief, and Economic Security Act (the “Act”) provides retirement plan relief and makes financial assistance available to certain individuals affected by COVID-19. 

1. Required minimum distributions waived for 2020. The Act suspends required minimum distributions for calendar year 2020 from almost all retirement plans, including certain defined contribution plans and individual retirement accounts, for both plan participants and beneficiaries. This provides relief to people who do not want to withdraw funds from retirement accounts at a time when portfolio values have generally fallen due to COVID-19.
   
   An individual who reached the age of 70 ½ in 2019, and therefore whose first distribution year was 2019, but who postponed their 2019 required minimum distribution to the period January 1- April 1, 2020, now does not have to take that postponed distribution at all. However, a person whose first distribution year was 2019 who did not postpone the required minimum distribution in 2019, cannot have such distribution retroactively rolled back into their account.
   
   For individuals whose required beginning date for commencement of required minimum distributions is April 1, 2020, such date for all other purposes, including determining whether a person’s death occurs before or after his or her required beginning date for commencement of lifetime distributions, shall remain the same despite the fact the initial required minimum distribution was waived by the Act.

Some people who took the 2020 required minimum distribution prior to the enactment of the Act nevertheless might be able to take advantage of the waived minimum required distributions. For example, some people may be eligible to roll the distribution over into an individual retirement account within 60 days of the distribution. The distribution already taken in 2020 is no longer a required minimum distribution by virtue of the Act and is therefore an eligible rollover distribution. Note that the 60-day window may have passed for certain distributions made at the beginning of 2020. It is possible the Internal Revenue Service will grant a blanket extension for the rollover of all such distributions, however no such guidance has been issued yet.

There is a general rule that, following the death of a retirement plan owner who dies without naming a designated beneficiary before his or her required beginning date of lifetime distributions, the benefits of the retirement plan must be distributed by the end of the year that contains the fifth anniversary of such owner’s death. The Act provides that in the case of an individual who dies in the years 2015 to 2019 who leaves a retirement plan subject to the five-year rule, the five-year period is changed to a six-year payout period.

Note that generally, required minimum distributions are not suspended for defined benefit plans that are Internal Revenue Code (“IRC”) Section 401, 403, and 457 plans, or IRC Section 457 non-government tax-exempt employer deferred compensation plans.

2. Penalty-free distributions from certain retirement accounts. Usually, if a person takes a withdrawal from a retirement plan before reaching the age of 59 ½, there is a 10% penalty on the early withdrawal. The Act temporarily eliminates the penalty on early withdrawals from certain retirement accounts for COVID-19 related distributions. The Act permits a person affect by COVID-19 to receive a penalty-free distribution from his or her retirement plan of up to $100,000 any time in 2020. To be eligible, the person must certify that (1) the person, his or her spouse, or an individual they claim as a dependent for tax purposes was diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or (2) the person is experiencing adverse financial consequences due to COVID-19 as a result of being quarantined, furloughed, laid off, unable to work due to lack of child care, or having work hours reduced.

Such distributions may, but need not, be repaid back into the retirement plan within the three-year period beginning on the day after the date of the distributions. Such repayments may be made without regard to annual contribution limits. Any such repayment may be made in one lump sum or in smaller payments in an aggregate amount not to exceed the amount of such distribution over the three-year period. If the distribution is not repaid to the account, the distribution will be treated as ordinary income and the recipient will be required to pay income tax on the amount that is not repaid. The Act provides that the inclusion in income will be spread equally over a three-year period.

3. Increase in maximum loan amounts from certain retirement accounts. The Act permits participant loans of up to 100% of the participant’s vested account balance, up to $100,000, for loans taken by individuals affected by COVID-19 from account balances of qualified employer plans on or before September 23, 2020. This is an increase from the previous limit of 50% of the vested account balance, up to $50,000. To be eligible, the person must meet the same criteria as described above for penalty-free distributions.

The Act permits individuals with outstanding loans from qualified employer plans to delay repayment of such loan. For loans with due dates between March 27, 2020 and December 31, 2020, the Act extends the due date by one year (or, if later, September 23, 2020).

This advisory was prepared by members of Nutter’s Tax Department and Natalie Choate in the Private Client Department. For more information, please contact your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.