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CARES Act Memo

Thursday, April 23, 2020

CARES Act Memo

On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a massive relief bill for those suffering as a result of the Coronavirus pandemic was passed by the House and signed by the President. This legislation is aimed at providing relief for individuals and businesses that have been negatively impacted by the coronavirus outbreak.   For some of the below key provisions that apply to IRAs and/or Retirement Plans, certain qualifications have to be met to be considered a qualified individual.  Qualified individuals are defined as:

  • Someone diagnosed with the virus by a test approved by the Centers for Disease Control and Prevention.
  • Someone whose spouse or dependent is diagnosed with the virus by a test approved by the Centers for Disease Control and Prevention.
  • Someone who experiences adverse financial consequences due to the virus as a result of one or more of the following:
    • Being quarantined, furloughed, laid off, or having work hours reduced due to the virus
    • Being unable to work due to lack of child care due to the virus
    • Business owners unable to work due to the closing or reduction of hours
    • Other factors determined by the Secretary of Treasury
For the following key provisions, you must be a qualified individual:
  • IRA and Retirement Plan distributions of up to $100,000 that is exempt from the 10% early distribution penalty.  Effective through December 31, 2020.
    • Although the penalty is waived the distribution will be taxable, the option of spreading the federal taxes over a 3 year time frame is also included along with a 3 year rollover (repayment) provision.
    • Not subject to the Retirement Plan 20% mandatory federal withholding.
  • For the next 180 days, a qualified individual in a plan may take a loan of 100% of his/her vested account up to $100,000.  Furthermore, any loan payment due on an outstanding loan between the date of enactment and December 31, 2020, is delayed up to one year.  The five-year repayment period is also extended for one year.  Interest accrues on the loan during the delay period.
  • Because of the uncertainty about how repayment of coronavirus-related distributions will be handled, and the tax impact of such repayment, it may be advisable for participants to take loans first.  As the repayments may be delayed as discussed above, the immediate effect is the same (i.e., the participant gets money in pocket), but the repayment ramifications are clear.  If the participant ultimately terminates employment within the year, the loan can be converted to a distribution at that time.
Key provisions that affect IRAs and Retirement Plans in which you do not have to be a qualified individual:
  • Required minimum distributions (RMD) for tax year 2020 have been suspended and do not have to be taken. 
  • If 2019 was the first year for you to take an RMD and you chose to delay until 2020, those RMDs have also been suspended.
  • The RMDs have also been suspended for Inherited IRA and Retirement Plan beneficiaries who are not subject to the 10-Year payout rules.  If the distributions were part of a 5-Year payout schedule, an additional year has been added.
  • If you have already taken your 2020 RMD, you may wish to consult with a tax advisor to determine if some or all of the distributions may qualify either for conventional rollover treatment or for repayment treatment as a Coronavirus-Related Distribution.
  • The deadline to make a 2019 IRA contribution has been extended until July 15, 2020.

This summary is not an all-inclusive listing of provisions pertaining to IRAs and Retirement Plans, but they are key in what First Merchants Private Wealth Advisors considers the essential provisions.  The Act also includes provisions for many different sections of the economy.

 

Retirement savings are a crucial component of an overall financial plan and factor strongly into the comprehensive and coordinated approach First Merchants Private Wealth Advisors delivers to our clients.  If you have any questions or concerns, your First Merchants Advisor is readily available to discuss them with you. 

 

Eva Kreps
 
 

 

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