Kitces Report: Jeffrey Levine: Using Coronavirus-Related Distributions To Manage Tax Exposure (May 6, 2020)

The Kitces Report has published a new article by Jeffrey Levine, Using Coronavirus-Related Distributions To Manage Tax Exposure (May 6, 2020). The Executive Summary is as follows:

In response to the COVID-19 global pandemic, the US Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act last month. A more than $2 trillion emergency fiscal stimulus package, the CARES Act was enacted to help ease the effects of the resulting economic damage caused by the pandemic by providing a wide range of provisions, including loans and tax credits, with the aim of helping individuals, businesses, healthcare entities, and state and local governments meet short-term cashflow demands. Among the many provisions provided by the CARES Act is the Coronavirus-Related Distribution for individuals affected by COVID-19.

Coronavirus-Related Distributions of up to $100,000 can be made from IRAs, employer-sponsored defined contribution plans, and/or employer-sponsored defined benefit plans during in 2020 (and 2020 only) by a qualifying individual. Qualifying individuals are persons whose health or finances have been impacted by the coronavirus as described by the CARES Act. More specifically, individuals (or their spouses or dependents) who have been diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention are eligible, as well as individuals who have been financially impacted by COVID-19 because they have quarantined, furloughed, laid off, or have had to reduce their work hours; unable to work due to lack of childcare; or, for are business owners who have had to close their business or reduce the number of business hours they can remain open. The Secretary of the Treasury may determine additional factors for eligibility, though no further factors have been established to date.

The $100,000 Coronavirus-Related Distribution limit is an aggregate amount for all 2020 Coronavirus-Related Distributions beginning January 1, 2020.  While distributions from IRAs can be taken as long as the individual meets the requirements to take a distribution in the first place, current employees who are participants in employer-sponsored defined contribution and defined benefit plans won’t be able to take distributions if the plan does not allow participants to access their funds prior to separation from the company.

Current employees of a company participating in the employer’s defined contribution plan may be able to access plan money to take a Coronavirus-Related Distribution via a plan’s hardship distribution provision or in-service distribution provision. Additionally, the CARES Act allows employers to amend their documents to make Coronavirus-Related Distributions their own distributable event, allowing any qualifying individuals to take such distributions at any time during 2020!

Distributions from defined benefit plans to current employees are more restricted, however, since hardship distributions are not allowed. Furthermore, while employers have the option to allow in-service withdrawals for participants age 59 ½ or older, employers do not have the option to amend their defined benefit plan to allow for Coronavirus-Related Distributions to be their own distributable event (as can be done with defined contribution plans).  Accordingly, current employees who meet the requirements for Coronavirus-Related Distributions may only take a distribution from a defined benefit plan if their plan allows for in-service withdrawals, assuming they meet the age requirement for those plan withdrawals (no younger than 59 ½).

There are several potential benefits of Coronavirus-Related Distributions, including that they are exempt from the 10% early distribution penalty, income from the distribution (which must all be taken in 2020) can be reported as taxable income over three years, and repayments of the distribution can be made up to three years after the Coronavirus-Related Distribution was received. In addition, mandatory tax withholdings are not required for distributions from employer-sponsored retirement plans, and for employers can amend defined contribution plans to permit participant withdrawals that would otherwise be prohibited.

Coronavirus-Related Distributions provide opportunities for advisors to help eligible clients with some alternative planning strategies. One such strategy can be used by clients who already took 2020 RMDs but who didn’t need to use the funds; they can designate the RMD as a Coronavirus-Related Distribution instead, as a means to return the unwanted RMD (as the CARES Act eliminated 2020 RMDs from IRAs and employer-sponsored defined contribution plans). Another strategy can be used by clients who may benefit from moving less-accessible funds in an employer-sponsored retirement plan into a more-accessible IRA (e.g., if a client believes they may be subject to limited cash-flow in 2021 or later, having funds in their IRA may be much easier to access in subsequent years than funds in their 401(k) plan that only allowed for Coronavirus-Related Distributions to be taken in 2020).

Ultimately, the key point is that the CARES Act offers individuals whose health or financial situation is affected by COVID-19 some relief through Coronavirus-Related Distributions by potentially allowing them to more easily access retirement funds that may not have otherwise been accessible.

To see full article, click: Using Coronavirus-Related Distributions To Manage Tax Exposure.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

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