The IRS Issues Updated Guidance on the CARES Act 2020

The IRS Issues Updated Guidance on the CARES Act 2020

Earlier this year, we shared with our clients the specifics of the CARES (Coronavirus Aid, Relief, and Economic Security) Act of 2020 (H.R. 748) passed by Congress and signed by President Trump on March 27, 2020.  As you may recall, one of the notable provisions of the Act was the temporary elimination of the IRS rule that owners of a defined-contribution (not defined benefit) retirement plan, including a 401(k) or 403(b) plan, or an IRA, who turned age 70½ prior to December 31, 2019 take a Required Minimum Distribution (RMD) from their plans in 2020.  Plan owners who had already taken a distribution between February 1 and May 15 were allowed to return their distribution (referred to as a “rollover”) to their IRA or an eligible retirement plan thereby eliminating any tax liability for 2020 related to the RMD.  The rollover had to occur by July 15th and within 60 days of the initial withdrawal.  However, plan owners who had taken their RMDs prior to February 1st, were not eligible to return their RMDs.

On June 23, the IRS issued guidance (IRS Notice 2020-51) regarding the above temporary rule change.  The good news is that for plan owners who had taken their RMDs prior to February 1 and thus were prohibited from returning the RMD to their IRAs or eligible retirement plans, they may now return their RMD up until August 31, 2020.  This also applies to non-spouse beneficiaries of inherited IRAs who are normally prohibited from rolling over any distribution from an inherited IRA and were excluded from the initial interpretations of the CARES Act.

The IRS has also indicated that coronavirus related distributions (CRD) may be rolled over anytime within three years after the distribution was received thus eliminating any tax liability.  Additionally, CRDs are not subject to the once-per-12-months limit on IRA-to-IRA rollovers.  The IRS has expanded the categories of “qualified individuals” whose 2020 retirement plan distributions can be treated as CRDs.  This generally includes people directly impacted by either reduced pay, furloughs, work-related cutbacks, etc. or those who were actually diagnosed with the coronavirus.  While retired individuals will not have been impacted by work issues related to coronavirus, if they or their spouse was diagnosed with coronavirus, the CRD would apply.

Although the above guidance will only impact a small percentage of investors, we want you to know that we can assist you with any questions that you may have regarding this unique guidance from the IRS related to the CARES Act.