Family First Corona Response Act (CARES Act)
In response to the Coronavirus pandemic the Family First Response Act was passed on March 18th.
No 10% additional tax for coronavirus-related retirement plan distributions
Background. A distribution from a qualified retirement plan is subject to a 10% additional tax unless the distribution meets an exception under Code Sec. 72(t).
New law. The CARES Act provides that the Code Sec. 72(t) 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000. (Act Sec. 2202(a)(1))
A coronavirus-related distribution is any distribution (subject to dollar limits discussed below), made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan (defined in Code Sec. 402(c)(8)(B)), made to a qualified individual. (Act Sec. 2202(a)(4)(A))
A qualified individual is an individual (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent (as defined in Code Sec. 152) is diagnosed with such virus or disease by such a test, 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. (Act Sec. 2202(a)(4)(A)(ii))
The administrator of an eligible retirement plan may rely on an employee's certification that the employee satisfies the conditions of (3) above in determining whether any distribution is a coronavirus-related distribution. (Act Sec. 2202(a)(4)(B))
Limit on distribution. The aggregate amount of distributions received by an individual which may be treated as coronavirus-related distributions for any tax year cannot not exceed $100,000. (Act Sec. 2202(a)(2)(A))
If a distribution to an individual would (without regard to the $100,000 limit in Act Sec. 2202(a)(2)(A)) be a coronavirus-related distribution, a plan is not treated as violating the Code merely because the plan treats such distribution as a coronavirus-related distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $100,000. (Act Sec. 2202(a)(2)(B))
For this purpose, the term ''controlled group'' means any group treated as a single employer under Code Sec. 414(b), Code Sec. 414(c), Code Sec. 414(m), or Code Sec. 414(o). (Act Sec. 2202(a)(2)(C))
Distribution can be contributed back to retirement plan. Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Sec. 402(c), Code Sec. 403(a)(4), Code Sec. 403(b)(8), Code Sec. 408(d)(3), or Code Sec. 457(e)(16), as the case may be. (Act Sec. 2202(a)(3)(A))
If a contribution is made pursuant to Act Sec. 2202(a)(3)(A) with respect to a coronavirus-related distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer is, to the extent of the amount of the contribution, treated as having received the coronavirus-related distribution in an eligible rollover distribution (as defined in Code Sec. 402(c)(4)) and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. (Act Sec. 2202(a)(3)(B))
If a contribution is made pursuant to Act Sec. 2202(a)(3)(A) with respect to a coronavirus-related distribution from an individual retirement plan, then, to the extent of the amount of the contribution, the coronavirus-related distribution is treated as a distribution described in Code Sec. 408(d)(3) and as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. (Act Sec. 2202(a)(3)(C))
Distribution can be included in income over three years. In the case of any coronavirus-related distribution, unless the taxpayer elects not to, any amount required to be included in gross income for such tax year will be so included ratably over the 3-taxyear period beginning with such tax year. (Act Sec. 2202(a)(5)(A)) For this purpose, rules similar to the rules of Code Sec. 408A(d)(3)(E) apply. (Act Sec. 2202(a)(5)(B))
For purposes of Code Sec. 401(a)(31), Code Sec. 402(f), and Code Sec. 3405, coronavirus-related distributions are not treated as eligible rollover distributions. (Act Sec. 2202(a)(6)(A))
Also, a coronavirus-related distribution is treated as meeting the requirements of Code Sec. 401(k)(2)(B)(i), Code Sec. 403(b)(7)(A)(i), Code Sec. 403(b)(11), Code Sec. 457(d)(1)(A), and 5 USC 8433(h)(1). (Act Sec. 2202(a)(6)(B))
Loans from qualified plans. The CARES Act provides flexibility for loans from certain retirement plans for coronavirus-related relief. (Act Sec. 2202(b))
Effective date. Act Sec. 2202 applies to distributions made on or after January 1, 2020, and before December 31, 2020. (Act Sec. 2202(a)(4)(A))
RMD requirement waived for 2020
Background. In general, Code Sec. 401(a)(9) requires a retirement plan or IRA owner to take required minimum distributions (RMDs) annually once the owner reaches age 72.
New law. The CARES Act provides that the RMD requirements do not apply for calendar year 2020 to: (I) a defined contribution plan described in Code Sec. 403(a) or Code Sec. 403(b); (II) a defined contribution plan which is an eligible deferred compensation plan described in Code Sec. 457(b) but only if such plan is maintained by an employer described in Code Sec. 457(e)(1)(A); or (III) an individual retirement plan. (Code Sec. 401(a)(9)(I)(i), as amended by Act Sec. 2203(a))
The RMD requirements also do not apply to any distribution which is required to be made in calendar year 2020by reason of: (I) a required beginning date occurring in calendar year 2020, and (II) such distribution not having been made before January 1, 2020. (Code Sec. 401(a)(9)(I)(ii), as amended by Act Sec. 2203(a))
For purposes of the Code Sec. 401(a)(9) RMD rules: (I) the required beginning date with respect to any individual is determined without regard to the temporary RMD waiver rules of Code Sec. 401(a)(9)(I) for purposes of applying the RMD rules for calendar years after 2020; and (II) if the 5-year rule of Code Sec. 401(a)(9)(B)(ii) applies (in general requiring a retirement plan to distribute its assets within five years of the death of the employee), the 5-year period is determined without regard to calendar year 2020. (Code Sec. 401(a)(9)(I)(iii),as amended by Act Sec. 2203(a))
Eligible rollover distributions. If all or any portion of a distribution during 2020 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under Code Sec. 401(a)(9) had applied during 2020, such distribution is not be treated as an eligible rollover distribution for purposes of Code Sec. 401(a)(31), Code Sec. 3405(c), or Code Sec. 402(f). (Code Sec. 402(c)(4), as amended by Act Sec. 2203(b))
Effective date. The amendments made by Act Sec. 2203 apply for calendar years beginning after December 31, 2019. (Act Sec. 2203(c)(1))
If Act Sec. 2203(c)(2) applies to any pension plan or contract amendment (see below), such pension plan or contract does not fail to be treated as being operated in accordance with the terms of the plan during the period beginning on the date of enactment of the Act and ending on December 31, 2020, solely because the plan operates in accordance with the temporary RMD suspension rules of Act Sec. 2203. In addition, except as provided by the Secretary of the Treasury, such plan or contract does not fail to meet the requirements of Code Sec. 411(d)(6) (Sec. 204(g) of the Employee Retirement Income Security Act of 1974) by reason of such amendment. (Act Sec. 2203(c)(2)(A))
Act Sec. 2203(c)(2) applies to any amendment to any pension plan or annuity contract which: (I) is made pursuant to the amendments made by Act Sec. 2203; and (II) is made on or before the last day of the first plan year beginning on or after January 1, 2022. (Act Sec. 2203(c)(2)(B)(i)) In the case of a governmental plan, clause (II) is applied by substituting''2024'' for ''2022''. (Act Sec. 2203(c)(2)(B)(i))
Act Sec. 2203(c)(2) does not apply to any amendment unless during the period beginning on the date of enactment of the Act and ending on December 31, 2020, the plan or contract is operated as if such plan or contract amendment were in effect. (Act Sec. 2203(c)(2)(B)(ii))