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Reporting Coronavirus-Related Distributions

“With the creation of Coronavirus-Related Distributions (CRDs) and the ability to pro rate the taxation and pay the withdrawal back within three years, how will retirement plan and IRA administrators, as well as individuals, report these transactions to the IRS? Won’t it be a big mess?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Washington is representative of a common inquiry related to CRDs.

Highlights of the Discussion

While we do not have definitive reporting guidance yet, we anticipate the IRS’s reporting procedures for CRDs will be similar to those the agency already has in place for “qualified disaster distributions” (QDDs). It seems we’ve been here before.

For CRDs, the IRS will waive the 10% early distribution penalty for the first $100,000 taken from an eligible retirement plan due to Coronavirus. Distribution recipients may pay back the amount within three years (2020, 2021 and 2022); and taxation can be spread over three years. The term ‘‘eligible retirement plan’’ includes an IRA (as well as an IRA-based plan), qualified plan, qualified annuity plan, governmental 457(b) plan or 403(b) plan.

Like CRDs, QDDs, were tax-favored withdrawals and repayments from certain retirement plans for taxpayers who suffered economic losses as a result of disasters like those for Hurricanes Harvey, Irma and Maria, and the California Wildfires. The most recent IRS Publication 976, Disaster Relief and Forms 8915-A, 2016 Qualified Disaster Retirement Plan Distributions and Repayments and 8915-B Qualified 2017 Disaster Retirement Plan Distributions and Repayments and their instructions (Instructions to Form 8915-A and Instructions to Form 8915-B) give us a pretty good idea of what the IRS will expect for CRDs with respect to reporting. No doubt there will be some “tweaks” needed to these materials to encompass CRDs, but at least we know we are not starting from scratch!

Conclusion

When and how much of a CRD a recipient pays back (rolls over) within the next three years will dictate his or her precise reporting protocol. Reporting will not be the same for everyone. It may involve filing amended tax returns, but rest assured there will be a manageable process for plan and IRA administrators, as well as IRA owners and plan participants to account for CRDs.

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CARES Act Payment and IRA Contributions

“My client wants to know the following:  ‘Can I use my $1,200 Coronavirus Aid, Relief, and Economic Security (CARES) Act payment to make an IRA contribution? My other income comes from Social Security, pension payments and interest income payments.’”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Nevada is representative of a common inquiry related to IRA contributions.

Highlights of the Discussion

Unfortunately, no, the CARES Act payments are actually “Recovery Rebates” or “credit against taxes,” according to Section 2201 of the CARES Act and, therefore, would not be considered earned income for IRA contribution purposes [see Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)].  An individual must have wages or self-employment income to make an IRA contribution. Wages and self-employment income are commonly referred to as earned income.  Social Security, pension and interest income are not considered earned income for IRA contribution purposes, either.

The CARES Act payments are an early credit on a tax filer’s 2020 tax liability. The IRS will use the tax filer’s 2018 tax return to determine benefits, unless the individual or couple has already filed their 2019 Federal tax return. Individuals who are not dependents may receive up to $1,200 (i.e., single filers and heads of households); joint filers can receive up to $2,400; and there is an additional rebate of $500 per qualifying child, if they have adjusted gross income (AGI) under $75,000 (single), $150,000 (joint), or $112,500 (heads of household) using 2019 tax return information. The rebate phases out by $50 for every $1,000 of income earned above those thresholds.

If your client had some self-employment or even part-time wage income from actual service performed, then an IRA contribution based on such income would be feasible.

Conclusion

What can and cannot be used as eligible earned income to support an IRA contribution can be confusing. While CARES Act Recovery Rebates are welcome relief, they are not considered income for IRA contribution purposes.

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RMDs as annuitized payments

“A unique question arose late last week from an advisor with a wealthy 72-year-old client. In 2018, the client annuitized a large annuity contract to begin his required minimum distributions (RMDs) from his IRA. The client heard that because of a law change, he could suspend his RMD payment for 2020, so he wanted to skip his 2020 annuity payment. Can the client stop his 2020 RMD annuity payment from his IRA?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Colorado is representative of a common inquiry related to required minimum distributions (RMDs)

Highlights of the Discussion

  • While we are still awaiting additional operational guidance from the IRS on the Coronavirus Aid, Relief, and Economic Security (CARES Act), which allows for the waiver of RMDs for 2020, the answer in this scenario is most likely no—an IRA owner may not waive an annuitized payment. The form of his distribution (i.e., annuitized payments) makes the 2020 suspension or RMDs problematic and unlikely.
  • Payments from an annuity contract take several forms. The most common payout option is periodic payments, calculated on an annual basis using a contract value and life expectancy figure, which, generally, may be stopped or modified in certain circumstances [IRC Sec. 401(a)(9)].
  • A less common choice is annuitization, where the contract is surrendered to an insurance provider in exchange for a promise to make payments for a specified time and amount. Annuitized payment choices are irrevocable ([Treasury Regulation 1.401(a)(9)-6].
  • The suspension of 2020 RMDs comes from the newly enacted federal law (the CARES Act). However annuity contracts are regulated by state not Federal law. The annuity payments obligations are based the annuity contract terms. Once the contract is annuitized the payments cannot be modified. Thus, while periodic RMD payments from an annuity could be suspended for 2020, if the client annuitized the contract—no change to the payments is permitted.
  • After additional discussion with the client, we determined the IRA contract had been annuitized and, conservatively, no changes to the payments would be possible.

Conclusion

While many who are subject to 2020 RMDs have the option to waive the withdrawals pursuant to the CARES Act, there are some exceptions, including annuitized payments.

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CARES Act Retirement Plan Funding Relief

“With all the recent rule changes, did Congress provide any funding relief for retirement plan sponsors?”   

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Kansas is representative of a common inquiry related to plan funding relief.

Highlights of the Discussion

  • There is some relief for certain defined benefit (DB) plans, and for money purchase pension plans, but not for other types of defined contribution plans. The limited relief is to help sponsors of single employer pension plans handle the “one-two punch” of decreased revenue flows and devalued plan investments.
  • Under the newly enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act, sponsors of single employer pension plans may delay payment of their 2020 contributions until January 1, 2021. This would include quarterly payments due in 2020 as well. (See Section 3608 on p. 133 of the CARES Act.)
  • If a pension plan sponsor delays contributions for 2020, it must increase the amount of each required contribution by any interest accrued during the period between the original due date for the contribution and the payment date, at the effective rate of interest for the plan year which includes such payment date.

Conclusion

The CARES Act included several provisions that affect qualified retirement plans. One such provision gives pension plan sponsors some funding relief for 2020.

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