The Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” was enacted by Congress and signed into law on March 27, 2020. This huge, 880-page Act was Congress’s attempt to assist the economy and those who were likely to be or have been hurt by the Coronavirus pandemic and its related social distancing and stay-at-home orders. This Newsletter reviews two critical tax deadlines created by the CARES Act that relate to the Required Minimum Distribution rules and the enhanced ability to access funds in Individual Retirement Accounts (IRAs) and Qualified Retirement Plans (QPs).

A. Most People That Would Normally Have to Take Required Minimum Distributions (RMDs) for 2020 Do Not Have to Take Them After All, and Many of Those Who Already Did Can Undo Them. For 2020, the CARES Act eliminated the need to take RMDs for owners of most (but not all) types of IRA and QPs (the RMD requirements continue to apply for 2020 for the participants in 457 plans that are sponsored by non-governmental tax-exempt entities). To take advantage of the elimination of the RMD for 2020, the owner of a retirement savings account who would otherwise be required to take an RMD for 2020 must simply not withdraw that amount from the account. For 2021, the normal RMD rules will once again apply.

What if you already took your RMD during 2020? For those proactive types who had already taken their 2020 RMDs before the CARES Act was enacted, IRS Notice 2020-51 provides relief. These folks have until August 31, 2020 to put the withdrawn funds back into their accounts. If the funds are recontributed to the accounts from which they were withdrawn no later than August 31, 2020, the account owners can avoid paying income taxes on them for 2020. Before the IRS issued Notice 2020-51, only those people who had taken RMDs on or after February 1, 2020 could avoid taxation on those withdrawn funds by recontributing. And even some people who had taken their RMDs on or after February 1, 2020 were prevented from recontributing their RMDs before this Notice was issued, because they were also subject to rules that normally allow only 1 rollover within a 12-month period limitation. Notice 2020-51 allows RMDs taken in January to also qualify for recontribution and states that the 1 rollover in 12 months limitation does not apply to prevent recontributions.

Please also note: if a 2020 RMD qualifies as coronavirus-related under IRS Notice 2020-50, as discussed below, then you have the additional options of either paying income tax on the RMD ratably over the three (3) year period of 2020, 2021, and 2022, or you can recontribute or rollover the RMD amount to the IRA or QP account from which it was withdrawn within this three (3) year period. You will need to file particular tax documents to get a refund of the income taxes paid on the distributed amount if you end up recontributing the assets back to the IRA or QP. These additional options are available to participants only and not to beneficiaries of deceased participants’ accounts.

B. We Now Have More Clarity Regarding Coronavirus-Related Distributions.The IRS has issued IRS Notice 2020-50, which answered some outstanding ambiguities and broadened the definition of a coronavirus-related hardship, providing some much-needed clarity about the rules that allow certain qualifying distributions, called “coronavirus-related distributions,” to be made from IRAs and QPs, as long as the distributions are made by December 30, 2020.

A coronavirus-related distribution is one that has been made to someone who suffers from a coronavirus-related hardship, as defined by the law. Coronavirus-related distributions of up to $100,000 will not be subject to the 10% penalty that otherwise applies to distributions made before the account owner reaches age 59 1/2. In addition, either the income tax incurred on these distributions can be paid ratably over the three (3) year period of 2020, 2021, & 2022, or the distributed amount can be recontributed or rolled back into the account from which it was withdrawn during that same three (3) year period of 2020, 2021, & 2022, avoiding taxes altogether.

As defined by the original law, coronavirus related hardships include the following: (i) you, your spouse, or your dependent was diagnosed with coronavirus via a test approved by the CDC; (ii) you experienced adverse consequences as a result of being quarantined, furloughed, or laid off, or your work hours were reduced due to the coronavirus, (iii) you are unable to work because of a lack of childcare due to coronavirus; (iv) as a result of the coronavirus, you had to close or reduce hours of a business you owned or operated; or (v) you were financially impacted by other factors as determined by the Treasury Secretary. Under the additional definitions provided by Notice 2020-50, additional qualifying situations include: (i) your having a reduction in pay (or self-employment income) due to coronavirus or having had a job offer rescinded or start date for a job delayed due to coronavirus; (ii) your spouse or a member of your household being quarantined, furloughed, or laid off, or having work hours reduced due to coronavirus, being unable to work due to lack of childcare due to coronavirus, having a reduction in pay (or self-employment income) due to coronavirus, or having a job offer rescinded or start date for a job delayed due to coronavirus; or (iii) closing or reducing hours of a business owned or operated by your spouse or a member of your household due to coronavirus. A member of your household is someone who shares your principal residence.

The Notice also clarified that you can use the coronavirus-related distribution rules with regard to as much as $100,000 in distributions from an IRA or QP regardless of the extent of your actual coronavirus-related financial hardship. As a result, having some coronavirus-related hardship can qualify the entire early distribution up to $100,000 for CARES Act relief.

In addition and while likely not within the spirit of the law, you may be able to convert up to $100,000 of retirement plan account assets into a Roth IRA with the requirement to pay the resulting income tax (or recontribute other assets back to the retirement plan) within three (3) years as long as you qualify as having qualified as having a coronavirus related hardship.

Query: If you otherwise qualify as suffering a defined coronavirus-related hardship, when would it be best to take advantage of this benefit if you do not actually need these funds for your support? It is important to note that the distribution and related taxation or recontribution requirements are based on the value of the distributed assets on the date of the distribution. As a result, should you wait until later in 2020 on the possibility of a market pull back so you can take the distribution at a lower value? The answer, as with most issues under the tax law, is that it depends on your particular situation.

If you would like to discuss these new tax deadlines in more detail or how the CARES Act may impact your estate plan, please call us at (678) 720-0750 or e-mail us at info@morgandisalvo.com to schedule a consultation. We can discuss your situation, answer your questions and determine what might be the best fit for you. We look forward to meeting with you.