Coronavirus Aid, Relief, and Economic Security (CARES) Act
The $2 trillion stimulus bill, known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was signed into law on March 27, 2020, and was immediately effective from date of enactment. It addresses a range of economic and health-related issues resulting from the coronavirus (COVID-19) pandemic. The following are retirement-related provisions and implications of the CARES Act that are applicable to the MO Deferred Comp plan:
- Required Minimum Distribution (RMD) Waiver
- Coronavirus-Related Distributions
RMDs to be paid during 2020 are waived for all types of defined contribution plans (including 401(a), 401(k), 403(b), and governmental 457(b) plans) and IRAs. This allows participants age 70½ and over to preserve their defined contribution retirement savings for this period.
Frequently Asked RMD Waiver Questions
The CARES Act has suspended RMD requirements for the 2020 calendar year. This includes 2019 RMDs that were delayed until April 1, 2020 and impacts the following plan types: 401(a), 401(k), 457(b), 403(a), 403(b), and IRAs.
If a participant or account holder has previously taken their RMD (which is now viewed as a regular distribution for tax purposes), he or she now has 60 days to roll that distribution over to a qualified retirement plan/IRA from date of distribution.
RMDs for beneficiaries have been suspended for 2020 as well. Regardless of which distribution period the beneficiary is following (5 years, 10 years, single-life, joint), the 2020 RMD is suspended and RMDs will resume in 2021. For those beneficiaries following a 5- or 10-year rule, they will gain an additional year. For those beneficiaries following a life expectancy calculation, they will resume normal calculations in 2021.
As of now, the guidance is that if the withdrawal happened within 60 days, then the withdrawal is eligible for rollover. We are waiting on additional guidance for those withdrawals that happened 60 days or more prior to March 27.
RMD installments will continue unless the participant contacts MO Deferred Comp’s record keeper ICMA-RC and requests that the payments be stopped. At that time, he or she must provide a restart date.
The CARES Act suspended all 2020 RMDs, including those not taken to satisfy a 2019 RMD as of March 27, 2020. Therefore, if a participant chose to delay his or her first RMD until April 1, 2020 (the required begin date), the CARES Act grants relief and 2019 RMD requirements have been suspended as well.
Withdrawals are subject to normal income tax and must follow standard tax treatment. If a withdrawal is determined to be a coronavirus-related distribution, explained below, then certain tax relief has been granted.
Yes. Participants may request a stop payment and current day reinvestment.
Participants should speak with a tax advisor about any changes impacting their specific tax situation. MO Deferred Comp and ICMA-RC cannot provide tax or legal advice.
The bill creates a new in-service distribution type from a plan or IRA called a “coronavirus-related distribution” (CRD). The provisions are similar (but not identical) to relief provided in prior years for natural disasters. To be eligible for CRD treatment, the distribution must be made to an individual who is diagnosed with the disease, has a spouse or dependent who is diagnosed, or has experienced adverse financial consequences as a result of the disease. Employees may self-certify eligibility.
Delayed Federal Income Tax and Penalty Waiver. Unless the individual elects otherwise, a CRD is included in gross income in equal amounts over three years. In addition, if the individual would owe the 10% early withdrawal penalty, that penalty is waived for CRDs.
In-service Distribution. A plan may allow a CRD notwithstanding the restrictions that apply to in-service distributions. Thus, for example, a governmental 457(b) plan could offer a CRD to an employee who is not otherwise eligible for in-service distributions.
Eligible Distributions. The distribution must be made on or after Jan. 1, 2020, and before Dec. 31, 2020. The maximum amount for an individual is $100,000 from all plans and IRAs.
Withholding. The mandatory 20% withholding, and requirement to provide a 402(f) notice, which normally apply to eligible rollover distributions, is waived for a CRD.
Repayment. To enable participants to restore their retirement savings, the law allows the distribution to be repaid during the three-year period beginning on the day after the date the distribution is made, back into a plan or IRA. In that case, the repayment is treated similar to a rollover. To repay your CRD, complete and submit the Indirect Rollover Form.
Frequently Asked CRD Questions
To qualify for a CRD, one must:
- be diagnosed with SARS-CoV-2 or with Coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention; or
- have a spouse or dependent be diagnosed with SARS-CoV-2 or with Coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention; or
- experience adverse financial consequences as a result of being quarantined, furloughed, laid off and/or having work hours reduced, being unable to work due to lack of childcare, closing or reducing hours of a business owned or operated by the individual; or
- meet any other factors as may be determined by the Treasury Secretary.
The following tax relief will apply:
- 10% early withdrawal penalty waived, if applicable
- Ability to spread tax liability over three years
- May be repaid to retirement savings account
- Up to $100,000 per individual may be distributed across all plan types
- The distribution option is applicable only for withdrawals made in 2020 calendar year
- The distribution is not eligible for rollover
CRDs are not subject to a 10% early withdrawal penalty; however, CRDs are subject to normal income tax and must follow standard tax treatment. For 401(a), 401(k), 403(a), 403(b), and 457(b) plans, the 20% mandatory federal withholding is waived and will not be withheld from the gross amount.
Distributions up to $100,000.00, across all retirement plan types, may qualify for the CRD tax relief.
Ordinary income tax may be applied pro-rata over a three-year period, beginning in tax year 2020.
Participants may pay back CRDs within the three-year period. However, there is no requirement that the CRD is paid back.
Distributions taken prior to January 1, 2020 do not qualify for the CRD relief. CRDs are distributions made on or after January 1, 2020, and on or before December 31, 2020.
When taking a CRD from any plan, the participant must self-certify using the certification form. The certification form captures the participant or account holder’s signature and attestation to meeting the CRD requirements.
The MO Deferred Comp Plan is diligently working alongside their record-keeper, ICMA-RC, to develop a streamlined process to assist you with CARES Act questions and distributions. We will proactively provide updates and clarifications as quickly as possible. If you have additional questions, please contact your local education specialist or call 1-800-392-0925.
Source: Coronavirus Aid, Relief, and Economic Security Act Signed into Law; https://www.icmarc.org/about-us/news-and-updates/media-inquiries/news-20200330washingtonperspectivecoronavirusaid.html