There have been many changes in the last year in the rules governing distributions, rollovers, loans and more. A workshop in the recent NTSA Summit offered a detailed look at those changes.
In “Navigating the New Minefield of Distributions, Repayments/Rollovers, & Loans,” Susan Jennings, an attorney with Erhard & Jennings, P.C. who specializes in advocating on behalf of governmental policies which protect and encourage citizens to save for retirement, took a detailed look at the effect of three major pieces of legislation that have been enacted in the last year and a half: the Setting Every Community up for Retirement Enhancement (SECURE) Act, enacted Dec. 20, 2019; the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27, 2020; and the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted Dec. 27, 2020.
SECURE Act
Required minimum distributions (RMDs). Increased the age from 70½ to 72 when such distributions are required. Change applied to individuals who attained age 70½ after Dec. 31, 2019.
Stretch RMD rules. Upon the death of the IRA owner or the defined contribution participant, the individual beneficiary must draw down his or her inherited interest within 10 years. This applies regardless of whether RMDs began before the participant’s death.
The new rules do not apply to defined benefit plans; they also do not apply to payments to an “eligible designated beneficiary” as long as the payments will be distributed over a period not exceeding the life expectancy of the beneficiary and distributions begin within one year of the death. (Surviving spouses are not required to begin earlier than the date on which the participant/IRA owner would have attained age 72. Surviving spouses also have the option of converting the IRA to their own.)
An eligible designated beneficiary is a designated beneficiary who is: (1) the surviving spouse; (2) a child under the age of majority (10-year rule applies as of the date the child attains age of majority); (3) disabled or chronically ill; or (4) any other person who is not more than 10 years younger than the participant/IRA owner.
Non-individual beneficiaries such as estates and charities are subject to the “at least as rapidly rule” or the five-year rule.
The new rule generally applies in respect to deaths occurring after 2019. For governmental plans, the new rules apply to beneficiaries of participants who die after Dec. 31, 2021. For collectively bargained plans, the new rule applies to beneficiaries of participants who die after Dec. 31, 2019, or, if later, the date on which the last collective bargaining agreement terminates, but no later than Dec. 31, 2021.
Charitable contributions from IRAs. IRA owners age 70½ (not 72 as changed by SECURE for RMDs) or older may make a tax-free charitable contribution of up to $100,000 per year directly from the IRA to an eligible public charity. This also helps the IRA owner meet RMD requirements and can reduce income considered for Medicare premiums.
Qualified birth or adoption distributions. These are allowed to be taken from IRAs, defined contribution, 403(a) and (b) plans, or governmental 457 plans without a 10% penalty tax and without regard to whether it is an in-service distribution if it is taken one year from the birth or adoption of a child. This is limited to $5,000 per parent and per child. An amount equal to the distribution can be repaid without regard to the usual 60 day-time limit for rollovers. This applies to distributions made after Dec. 31, 2019.
In-service distributions. These are allowed at age 59½ for pension plans and governmental 457 plans.
Victims of natural disasters. The SECURE Act provides distribution relief for victims of natural disasters (the period for this has now expired). However, individuals who have taken advantage of this relief are allowed to recontribute the distribution within three years. The plan amendment deadline for adopting retirement-related disaster relief is no later than the last day of the first plan year beginning on or after Jan. 1, 2020 (Jan. 1, 2022 for government plans.)
Portability of lifetime income investments. Ninety days before the date a lifetime income vendor is eliminated from a plan, with the approval of the plan sponsor, the participant can roll over the lifetime income investment to an IRA or other retirement plan.
CARES Act
For provisions adopted by plans from the CARES Act, non-governmental plans must generally be amended by the last day of the first plan year beginning on or after Jan. 1, 2022 (generally Dec. 31, 2022 for calendar-year plans). For governmental plans it is by the last day of the first plan year beginning on or after Jan. 1, 2024.
The 10% early withdrawal penalty is waived for coronavirus-related distributions (CRDs) up to $100,000 (the 20% mandatory withholding requirement also does not apply). Amounts required to be included in the individual’s income because of a CRD will be included ratably over the individual’s 2020, 2021 and 2022. However, an individual may choose to opt out of this special tax treatment.
The CRD may be repaid to the plan in one or more payments at any time during the three-year period beginning on the day after the distribution was received.
New rules regarding CRDs apply to distributions made on or after Jan. 1, 2020 and before Dec. 31, 2020.
An individual qualified to make a CRD is an individual:
- who was diagnosed with coronavirus disease;
- whose spouse was diagnosed with coronavirus disease; or
- who experienced adverse financial consequences as result of being quarantined, furloughed, laid off, having hours reduced or being unable to work due to lack of childcare due to Covid-19, having a reduction in pay or self-employment income due to Covid-19, or having to close or reduce the hours of a business the individual owns or operates due to Covid-19.
The IRS issued Notice 2020-50 expanding the definition of an event qualifying for a CRD to include:
- an individual whose pay or self-employment income was reduced due to Covid-19 or having a job offer rescinded or start date for a job delayed due to Covid-19;
- an individual’s spouse or a member of the individual’s household being quarantined, being furloughed, laid off or having work hours reduced due to Covid-19, being unable to work due to lack of childcare due to Covid-19, having a reduction in pay or self-employment income due to Covid-19, or having a job offer rescinded or start date for a job delayed due to Covid-19; or
- closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to Covid-19.
IRS Notice 2020-68 states the plan sponsor or administrator can rely on the employee’s reasonable certification of eligibility.
The $100,000 limit on CRDs applies in the aggregate to all distributions to the qualified individual but the employer is only responsible for monitoring the limit for its own plans, not distributions from other plans in which the employee may participate.
Repayments can be made in one or more contributions in an aggregate amount not to exceed the amount of the distribution to an eligible retirement plan (not necessarily the one from which the distribution was taken) and will be categorized as a rollover contribution. The individual who does this would file a Form 8915-E and tax returns reporting the distribution would be amended. Recontribution is not available to beneficiaries other than surviving spouses of deceased participants and IRA owners. Plans that do not accept rollover contributions are not required to accept these repayments. The plan administrator can rely on the participant’s certification for determining if the contribution is in fact a repayment of a CRD.
A “qualified” individual could take a loan from his/her retirement plan up to $100,000 (minus any other outstanding loans) or 100% of the participant’s vest balance. Loans had to be made on or before Sept. 23, 2020.
If a qualified individual had an outstanding loan on or after March 27, 2020, any due date that fell on or after March 27, 2020 and no later than Dec. 31, 2020 could be delayed one year. Notice 2020-50 provides a safe harbor method to account for loan payments not made during the suspension period along with appliable interest so that loans can be reamortized for the remaining term plus one year starting Jan. 1, 2021. Use of the safe harbor is not mandatory as other reasonable methods can be used. Plans were not required to offer these loan changes.
It is optional for employers to adopt the distribution and loan rules under the CARES Act. An employer is permitted to choose whether and to what extent it wants to amend its plan for CRDs and/or loans but must have done in practice what the amended plan states. Even if an employer does not treat a distribution as a CRD, a qualified individual may treat a distribution that meets the requirements of a CRD as coronavirus-related on the individual’s tax return.
As part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, money purchase pension plans were allowed to make in-service distributions that could be treated as CRDs but they must amend the plan document as other plans are required to do.
Taxpayer Certainty and Disaster Tax Relief Act of 2020
Only distributions made on or after the first day of the incident period of the qualified disaster and before June 25, 2021 can qualify.
A participant who lives in a qualified disaster area and has sustained an economic loss can treat up to $100,000 of a plan distribution as a qualified disaster distribution (QDD). There is no 10% early withdrawal penalty applied to the distribution and income from the distribution can be recognized by the participant ratably over a three-year period.
If a participant took a hardship distribution from a plan to build or purchase a primary residence and instead used the distribution for other purposes due to the disaster, the participant can recontribute the amount of the distribution used for that purpose to the plan. The hardship must have been received 180 days before and up to 30 days after the qualified disaster. The repayment must be made within 180 days of the enactment of the act.
Plans may increase loan limits up to $100,000 for a participant who lives in a qualified disaster area and who has incurred an economic loss due to the disaster. The due dates for payments on outstanding loans of a participant in a qualified disaster area which payments were due as of the date of the disaster and ending 180 days after the disaster may be delayed for the later of one year or the date that is 180 days after the end of the disaster. Subsequent payments must be re-amortized to reflect the delay and accrued interest, and the period of the delay is disregarded in determining the five-year repayment deadline on the applicable loan.
If a plan allows this disaster relief which is optional there must be a retroactive amendment to the plan adopted by the last day of the first plan year beginning on or after Jan. 1, 2022 (Dec. 31, 2022 for calendar year plans and on or after Jan. 1, 2024 for governmental plans).
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