SECURE CARES: How the Coronavirus Pandemic has Effected Retirement Account Rules

Updated April 17, 2020.

Before March of this year, the “SECURE” Act that was signed into law December 20, 2019 and effective January 1, 2020, was the biggest news for holders of tax-deferred retirement accounts.  It made a number of substantial changes – for better and worse – which implicated the kind of estate planning advice we provide to our clients holding such retirement accounts.  However, as with most parts of law and society, the coronavirus pandemic has caused the Congress to “pause” some aspects of the SECURE Act and temporarily alter other pre-SECURE Act rules.

On Friday, March 27, 2020, Congress passed the “CARES” Act to help mitigate the huge economic upheavals caused by the Coronavirus pandemic facing the United States.  The biggest headlines from that legislation include massive loans to small and large businesses, as well as “stimulus” checks to families whose adjusted gross income falls below $75,000 for individuals and $150,000 for married couples filing jointly.  

But tucked within sections 2202 and 2203 of the new law, are some significant changes made to retirement accounts.  First, Congress has temporarily waived the 10% early withdrawal penalty for persons who withdraw up to $100,000 from their retirement account before age 59 ½ as a “coronavirus related distribution” (H.R. 748, Sec. 2202(a))  If you take this early distribution, but later find that your personal finances have weathered the storm, you may re-deposit some, or all, of the money withdrawn within three years of the distribution; again, without penalty.  

A “coronavirus related distribution” is defined as a distribution made between March 27, 2020 and December 31, 2020 to a person who is (1) officially diagnosed with the coronavirus; (2) whose spouse is officially diagnosed with the coronavirus; or (3) “who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.”  (H.R. 748, Sec. 2202(a)(4)(A)(ii))  Thus, if you have a retirement account, but endure some kind of adverse health or financial impact because of the pandemic, you may withdraw money from that account this year without incurring the 10% early distribution penalty.

Similarly, the upper limit for qualified loans from an employer-sponsored retirement account is raised to $100,000 (from $50,000).  Strangely though, this particular change is effective only for loans made within 180 days from the law’s effective date (rather than through December 31, 2020). (H.R. 748, Sec. 2202(b))  Nevertheless, if a loan you previously took out on your 401(k) requires re-payment between now and December 31, 2020, those repayments may be delayed for up to one year. 

But what about income taxes?  The distribution is still subject to being included as your income for tax purposes.  If you take full advantage of this law to tide you through the pandemic, will you see a big tax bill next year (for 2020)?  Not necessarily.  Unless you elect to include the income all in 2020’s taxes, the income distributed to you before December 31, 2020 will be ratably spread over the next three calendar years (2020, 2021 and 2022).  Why would someone not want to spread the income tax over three years?  Well, if a person lost their job in 2020 because of the pandemic, their income may be much lower than it would have been this year.  But if that same person secured a new job – at the same, or even higher pay – in early 2021, then it might make sense to have that income counted only in year 2020 (when your overall income was lower due to the period of unemployment), rather than added to your 2021 and 2022 gross income.

But let’s say you’re not worried about unemployment; you’re already retired.  What worries you most is that your 401(k) or IRA has taken a massive hit, and if you take your required minimum distributions out now, you might be compounding those losses.  Under Section 2203 of the CARES Act, the required minimum distribution (RMD) rules are suspended for calendar year 2020. (H.R. 748, Sec. 2203(a), which added new sub-section (I) to section 401(a)(9) of the Internal Revenue Code)  This suspension of RMDs is applicable even if your required beginning date is supposed to start in 2020.  That is, if you reached age 70 ½ before December 31, 2020 (under pre-SECURE Act rules), your required beginning date for RMDs would normally be April 1, 2020, but is now suspended until 2021.  It is important to point out this does not prohibit anyone from taking distributions from their retirement accounts (see above), but it does allow those retired persons who would like to leave their retirement fund alone during the tumult of 2020 to do so.

Keep in mind, however, that the recently-enacted rules on delaying 2020 RMDs are only a “pause”.  Absent some additional change to the law, in 2021, your “required beginning date” for RMDs will still be April 1st of the year after the year you turned 70 ½, or, in the case of  a retirement account that you inherited  from a non-spouse prior to 2020, your life expectancy.  For example, if, barring the CARES Act, your RMD would have been based on age 71 in 2020, but age 72 in 2021, you would still need to calculate your RMD using age 72 in 2021, even if you didn’t take an RMD in the year 2020.  In contrast, if the “5-year rule” applies to payouts on a deceased person’s retirement account, that 5-year limitation “shall be determined without regard to calendar year 2020.”  (IRC 401(a)(9)(I)(iii)(II))  It is not exactly clear what this means: whether the 5-year payout period now doesn’t need to end in 2020, or that such period will not start to run in 2020, or if a recipient is currently in the middle of the 5-year period whether another year gets tacked on.  Interestingly, the CARES Act appears only to “pause” the 5-year payout under IRC 401(a)(9)(B)(ii), but does not include any “pause” for the new 10-year payout period created under the 2019 SECURE Act for non-eligible designated beneficiaries.  

Although the CARES Act has made some important, and potentially helpful, changes to the tax laws controlling retirement accounts, not every option available is right for every person.  Just because we can do something, doesn’t necessarily mean we should.  What you may decide to do, or not do, with your retirement account demands thoughtful consideration and discussion (by telephone or video conference at least) with your financial advisor or other financial professional.  But during these turbulent times, arm yourself with all reliable information before making any decisions.


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