IRS Answers CARES Act Questions | Lord Abbett
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Retirement Perspectives

The agency published guidance for retirement plan provisions in the CARES Act to help investors and financial advisors understand the rules for distributions and loans.

Read time: 3 minutes

I recently wrote that qualified individuals under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act can take distributions—known as “Coronavirus Related Distributions (CRDs)”—up to $100,000.  Furthermore, the CARES Act offers increased loan limits up to $100,000, as well as a 12-month delay in making loan repayments. CRDs can be taken from both individual retirement accounts (IRAs) and/or employer sponsored workplace retirement plans (i.e. 401(k), 403(b), governmental 457(b)) anytime during 2020 while receiving tax relief; whereas plan loans are only available from employer plans. Loans are never allowed to be taken from an IRA.

On May 4, the Internal Revenue Service (IRS) published CARES Act retirement plan guidance in the form of 14 questions and answers (Q&A) offering much needed guidance related to CRDs and plan loans.

Here is a brief Q&A summary:

  • If you meet the definition of a “qualified individual,” the CARES Act waives the 10% early distribution penalty tax on Coronavirus Related Distributions (CRDs) if you are under age 59½, allows you to spread taxes evenly over three tax years (2020, 2021 and 2022), and permits you to recontribute (repay) CRDs to your IRA or employer sponsored workplace plan within three years. Notably, the IRS Q&A confirms that, even if an employer sponsored workplace plan does not offer CRDs, a “qualified individual” can still take advantage of the tax relief afforded by the CARES Act.
  • FAQs state that relief for in-service withdrawals is limited to 401(k), 403(b), and governmental 457(b) plans. However, the IRS goes on to state that defined benefit, cash balance, and money purchase pension plans cannot allow for in-service distributions under the CARES Act unless a distribution  is otherwise permitted (i.e. in-service distribution). In general, this means that distributions from a pension plan would not be permitted before age 59½, severance from employment, or disability. Furthermore, the IRS clarifies that spousal consent is required for a CRD if otherwise required by the plan.
  • Employer sponsored workplace plans are not required to accept rollovers (repayments) of CRDs. The IRS states that, while it expects employer plans to accept repayments of CRDs (made within the allotted 3 year period), such repayments will be treated as rollover contributions. Therefore, only employer sponsored plans that accept rollover contributions must accept CRD repayments. This shouldn’t be an issue as most employer plan accept rollovers.
  • A taxpayer is treated as a qualified individual (for CRD or increased plan loan amount) if the person meets one of the following definitions:
    * Has been diagnosed with COVID-19 (Coronavirus) by a test approved by the Centers for Disease Control (CDC)
    * Spouse or depending has been diagnose with  COVID-19 or
    * Have experienced “adverse financial consequences” due to COVID-19 by being:
             - Quarantine
             - Furloughed
             - Laid off
             - Reduced work hours
             - Unable to work due to lack of child care or
             - Closing or reducing hours of a business  owned by the person

    Tip! The IRS Q&A confirms that an individual will not be a “qualified individual” due to a spouse’s furlough, job loss, etc.
  • The CARES Act also offers “eligible individuals” (same requirement as CRD eligibility) increased amounts (up to $100,000) available for plans loans as well as special tax relief. However, unlike CRDs which are available throughout 2020 (January 1–December 31), increased limit for plan loans must be taken by September 22, 2020 (not September 23, 2020 as was originally thought).
  • In addition, the CARES Act permits plan loan repayments to be delayed for up to one year for those repayments scheduled to be made between March 27, 2020 and December 31, 2020.
  • The Q&A makes it clear employer sponsored workplace plans are not required to offer increased loan amounts, suspension of loan repayments or CRDs. expanded loans provision or CRDs. In other words, the plan sponsor will determine which, if any new CARES Act distribution provisions are available. Therefore, a plan participant needs to inquire with their employer whether the plan offers expanded loan amounts and or CRDs.
  • CRDs are reported on IRS Form 1099-R, even if the distribution is repaid during the same year.
  • Repayment of CRDs is permitted. Use Form 8915-E (expected to be available before the end of 2020) to report any repayment of a CRD and to determine the amount of any CRD includible in annual income.  
  • The CARES Act also waived required minimum distributions (RMDs) for 2020. The waiver is similar to RMD waiver provisions in the Worker, Retiree, and Employer Recovery Act (WRERA) of 2008 & IRS’s guidance.
  • Previously, it was unclear how a recipient of a CRD, who by default takes the distribution into income ratably over 3 years, and who subsequently repays the distribution to a plan would obtain the tax-free treatment for repaid distributions. The IRS has now clarified the participant would file an amended tax return for any prior years which included some or all of a CRD in income.   
  • Finally, the Treasury Department and the IRS say that they “anticipate releasing guidance in the near future” on the coronavirus-related distributions and loan provisions of the CARES Act that were not covered in the Q&A.


Advisors, if you have additional questions, please contact your Lord Abbett representative at 888-522-2388.

 

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY OF TERMS

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee’s SEP IRA.

A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts.

A 457 plan is available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).

A defined contribution plan is a retirement plan that's typically tax-deferred, e.g. a 401(k), at employers. An employee contributes a percentage of his/her paycheck in an account to fund retirement. The sponsor company will generally match a portion of employee contributions.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 72. Roth IRAs do not require withdrawals until after the death of the owner.

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