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Impact of CARES Act on IRA and Retirement Plans: FAQs

2020 CARES Act: FAQs

Background
On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, the third in a series of economic relief bills in response to the COVID-19 pandemic. The more than $2 trillion package seeks to address financial pressures facing individuals, businesses, and state and local governments due to the pandemic. The below FAQ includes more details about what this means for you.

Q: What is the CARES Act?

A: On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, the third in a series of economic relief bills in response to the COVID-19 pandemic. The more than $2 trillion package seeks to address financial pressures facing individuals, businesses, and state and local governments due to the pandemic.

Q: What are the key provisions of the CARES Act that impact IRAs and employer sponsored retirement plans?

A: The CARES Act provides for the following in 2020:

  • Waives Required Minimum Distributions (RMDs) from retirement accounts for calendar year 2020, including from beneficiary distribution accounts.
  • In some cases, allows for certain coronavirus-related distributions in 2020 for those who meet eligibility requirements.
  • Eligible coronavirus-related distributions are limited to an aggregate of $100,000 per individual and are not subject to the usual 10% early withdrawal penalty for those under age 59 ½.
  • Income tax due on the taxable portion of a qualifying distribution may be spread evenly over 3 years.
  • Qualifying distributions may be repaid to an IRA or an eligible retirement plan within a 3-year period.

Required Minimum Distributions (RMDs)

Q: Are individuals required to take RMDs for 2020?

A: The CARES act temporarily waives required minimum distributions (RMDs) for all types of retirement plans (including IRAs, 401(k)s, Profit Sharing/Money Purchase Plans and inherited IRAs/beneficiary distribution accounts) for calendar year 2020. This includes the first RMD, which individuals may have delayed from 2019 until April 1, 2020.

Q: Do individuals wishing to convert to a Roth IRA need to take their 2020 RMD first?

A: No. Under the CARES Act, RMDs taken by an individual are waived for the 2020 calendar year. Accordingly, there is no 2020 RMD to satisfy.

Q: If an individual already took his/her RMD are they allowed to roll the distribution back to an IRA and what are the timing requirements?

A: Generally, RMDs are not eligible for rollover. However, under the CARES Act, an RMD taken in 2020 is no longer required, it is voluntary and therefore not technically an RMD. A 60-day IRA rollover contribution allows individuals to deposit an eligible rollover distribution into their IRA (or, if permitted, a workplace savings plan) generally, as long as the deposit occurs within 60 days of the original distribution date.

Note: The IRS provided a limited extension to the 60-day rollover requirement in IRS Notice 2020-23. Under IRS Notice 2020-23, if a customer’s deadline to complete a 60-day eligible rollover contribution falls between April 1- July 14, 2020, the customer can complete this rollover contribution on or before July 15, 2020, and still comply with the 60-day rollover requirement. In other words, if the distribution occurred between February 1-May 14, 2020, the customer has until July 15 to complete the rollover. For distributions occurring on or after May 14, 2020, the 60-day rollover rule applies. This extended deadline does not waive the other requirements of an eligible rollover contribution. An individual is generally limited to one 60-day rollover per 12-month period. Customers should consult with their tax advisor on their options regarding any distributions received from their IRA or plan this year. The 60-day rollover rule does not apply to distributions made to beneficiaries that have inherited a retirement account except for the surviving spouse of the original IRA owner or plan participant.

Q: For individuals wishing to return 2020 RMDs already taken, can the federal and state tax withholding also be reversed?

A: Tax withholding generally cannot be reversed unless an error occurred. Eligible individuals have the option of rolling over the gross amount of any distribution, however, the tax withholding amount would have to be obtained from other sources, e.g. a non-retirement account, to fully offset the distribution. The taxes withheld will be a credit toward their 2020 tax liability.

Q: Are RMDs waived for inherited retirement accounts (BDAs) in 2020 as well?

A: Yes.

Coronavirus-related Distributions

Q: Who is eligible to take a coronavirus-related distribution under the CARES Act?

A: In some cases, the CARES Act allows for certain coronavirus-related distributions in 2020 for those who meet eligibility requirements. A qualified distribution is limited to $100,000 per individual.
Individuals considered eligible are those:

  • Who are diagnosed with SARS-COv-2 or COVID-19 by a test approved by the Center for Disease Control and Prevention.
  • Whose spouse or dependent is diagnosed with SARS-COv-2 or COVID-19 by such a test.
  • Who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a – business owned or operated by the individual due to SARS-COv-2 or COVID-19; or other factors as determined by the Treasury Secretary (or the Secretary’s delegate).

Q: What are the special tax rules for qualifying coronavirus-related distributions taken in 2020?

A: Qualifying coronavirus-related distributions:

  • are not subject to the 10% early withdrawal penalty for those under age 59½ or for Roth IRA distributions taken before the expiration of the 5-year period.
  • are not subject to the 20% mandatory federal income tax withholding on Self-Employed 401(k) & Profit Sharing Plan accounts.
  • The taxes due can be spread over 3 years.
  • may be repaid to an eligible retirement plan over 3 years.

Health Savings Accounts (HSA)
Q: What changes did the CARES Act make to the list of eligible expenses for health savings account (HSA) spending?

A: The list of eligible expenses for health savings account (HSA) spending has been permanently expanded to include over-the-counter medications, including antacids, pain relievers, and treatments for cold, flu, and allergy symptoms (without a prescription), and menstrual care products.

Q: Will COVID-19 testing and treatment be covered by a health savings account (HSA)?

A: Guidance from the IRS allows testing, vaccination, and treatment for COVID-19 under health savings accounts (HSA)-eligible health plans, potentially at no out-of-pocket cost even if the participant hasn’t met their annual deductible. Individuals should check with their health insurer for details.

Q: When is the deadline for 2019 IRA and health savings account (HSA) contributions?

A: The IRS confirmed that July 15, 2020, will be the deadline to make 2019 contributions to IRAs and health savings accounts (HSAs). Deadlines associated with contributions to workplace savings plans are not affected.

John Weninger, CFP®

John Weninger, CFP®

John is a Wealth Advisor within the Family Wealth Management area of the Company. He is the first point of contact for our prospective clients, conducting introductory meetings with clients to discuss their family dynamic and wealth management needs. John assumes the role of the client family’s Chief Financial Officer and coordinates with the client’s current professionals (i.e. attorney, tax accountant, stockbroker, insurance agent) to provide an integrated wealth management plan and investment solution that is custom tailored to meet each client’s specific needs. John began his career at Merrill Lynch as an advisor assistant, serving the needs of families & small business owners. He was the founder of Vision Wealth Partners, a Wisconsin registered investment advisor and has been helping families and small-business owners with financial planning and investment management since 2011. His writing has been featured on CNBC, Yahoo! Finance, U.S. News and MyCompanyRetirementPlan.com. John received his Bachelor’s Degree from St. Norbert College majoring in Finance. He earned his Certified Financial Planner (CFP®) in 2017.