IRS issues new guidelines to help in a pandemic

Julianne Mosher, BridgeTower Media Newswires

As families struggle with economic stress triggered by the coronavirus, experts say help could be on the way by tapping into retirement funds.

The Internal Revenue Service recently released new guidance to help retirement-plan participants affected by COVID-19. Provisions under the CARES Act are now providing enhanced access to plan distributions and plan loans.

“COVID-related distributions are reported as taxable income spread evenly over a three-year period, unless the taxpayer elects otherwise,” Veronique Horne, senior principal at Berdon, an account and advisory firm, said. “The individual may repay such distribution at any time during the three-year period beginning on the day after the distribution is received, in one or more payments.”

One important change for retirement plans is that required minimum distributions, or RMDs, for 2020 have been waived.

“Usually people are required to take some money from their IRA based on age,” Melissa Negrin Wiener, partner with Genser Cona Elder Law, said. “Now, 2020 RMDs are being waived, including inherited IRAs… this was something really important to get out to our clients.”

Under the new guidelines, there are certain requirements for eligibility. The coronavirus-related distribution is a distribution made from an eligible retirement plan to a qualified individual who was diagnosed with COVID-19. These guidelines extend to those whose spouse or dependent was diagnosed with the virus, who experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced, or was unable to work due to lack of child care. Other factors may apply based on the financial impact from the pandemic.

These regulations under Notice 2020-50 have altered IRA and required minimum distribution rules for eligible individuals. From Jan. 1 to Dec. 31, the act allows for up to $100,000 of early retirement withdrawals and the 10 percent penalty for early distributions has been waived for those under the age of 59½.

These repayment contributions will be treated as if the person received a nontaxable rollover distribution and will not affect the contribution limit for that year. But if the distribution is repaid within the three-year repayment period, the individual may file an amended income tax return to claim a refund of tax paid attributable to the amount of the distribution previously included in income.

Horne added that prior to enactment of the CARES Act, qualified employer retirement participants could borrow up to the lesser of $50,000 or 50 percent of their vested retirement plan benefits, which were subject to a five-year repayment period.

Now, starting March 27 through Sept. 23, the cap on loans from qualified employer plans to participants has increased to $100,000. “The repayment period for such loans with due dates between March 27, 2020 and Dec. 31, 2020 is delayed for one year,” she said. “Repayments of such loans will be adjusted for delay in the due date and interest will continue to accrue during the delayed repayment period... Calendar year 2020 will be disregarded for purposes of the five-year repayment period.”

Horne said beneficiaries of some inherited retirement plans must withdraw the fund investments over a five-year period. If such a beneficiary forgoes the RMD for 2020, the CARES Act determines the five-year period without regard to calendar year 2020, thereby extending the distribution period to six-years. “This provides an extra year for the assets to grow tax-deferred,” she said.

“It’s important to talk with your estate attorney,” Negrin Wiener added. “It’s important to seek the guidance of professionals because you could really be harming yourself or others.”

The general non-taxable 60-day deadline for IRA and RMD distributions to be contributed back to the IRA was extended through July 15, 2020. Under the new guidance, the deadline extends until Aug. 31. To avoid an income tax liability, an individual must return funds to the IRA by that date, regardless of when they withdrew the RMD.

The new rules can help families, but Horne urged caution. “Using retirement funds should be the absolute last resort,” she said. “There are certain disadvantages to taking out a loan against a 401(k) - the individual is taking out pre-tax dollars and repaying with after-tax dollars. There is also lost opportunity for growth of these assets within the 401(k). In addition, if the taxpayer ultimately loses or changes their employer, they will have to repay the loan shortly after leaving the employer.”

Tim Speiss, leader of EisnerAmper’s Personal Wealth Advisors Group, said that it could be an option as a loan, depending on the individual’s foreseeable future. “If you’re going to be staying with your current employer for the next three-to-five years, you’re better off taking it as a loan,” he said. “Definitely talk to your employer’s HR and 401(k) advisors.”

Negrin Wiener said clients are asking about about the new options. “This kind of opened everyone’s eyes,” she said. “It came full circle to remind everyone that it’s important to get their affairs in order. The more we get this info out there, the more it helps people.”