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Qualified Charitable Distributions in 2020

“I have a client who consistently has made Qualified Charitable Distributions (QCDs) for the last several years and wants to make another for 2020.  Are they still available even though required minimum distributions (RMDs) are suspended for 2020?”

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 South Dakota is representative of a common inquiry related to charitable giving.

Highlights of the Discussion

  • Yes, if your client is an “eligible IRA owner or beneficiary,” s/he can still make a QCD for 2020 if s/he does so by December 31, 2020. Although the gift will not have the added benefit of counting towards an RMD for the year (since none are due pursuant to the CARES Act), s/he’ll still be able to exclude the QCD from taxable income and have the satisfaction of supporting a good cause. Because the QCD reduces taxable income, other potential benefits may result, for example, a person may be able to avoid paying higher Medicare premiums because of the reduced income. Note that for those who make both QCDs and deductible IRA contributions in the same year, new rules as a result of the SECURE Act may limit the portion of a QCD that is excluded from income.
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactiveSEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • A QCD is any otherwise taxable distribution (up to $100,000 per year) that an eligible person directly transfers to a “qualifying charitable organization.” QCDs were a temporary provision in the Pension Protection Act of 2006.  After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Tax Exempt Organization Search, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions. Note that s/he would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD.
  • Changes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act made the decisions related to charitable giving more complicated in 2020. In addition to the above information on QCDs, the CARES Act created a new above-the-line deduction of $300 for charitable contributions, and allows for cash gifts to most public charities of up to 100 percent of adjusted gross income in 2020.  Because of the added complexity, seeking the advice of a tax professional regarding charitable giving would be the best course of action. IRS Publication 526, Charitable Contributions, provides good basic information on the topic.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7 , Q&A 40).

 Conclusion

Eligible IRA owners and beneficiaries, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.  Law changes have enhanced other giving options, making professional tax advice essential when making a gifting decision.

© Copyright 2021 Retirement Learning Center, all rights reserved
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CARES Act “Clean-Up in Aisle 9”

By W. Andrew Larson, CPC

Ah yes, how quickly we forget. Remember the Coronavirus Aid, Relief, and Economic Security (CARES) Act hurriedly passed by Congress and signed by President Trump on March 27th of this year?  Then the rush was on as plan sponsors incorporated the seeming plethora of participant-friendly, COVID-related provisions into their qualified plans. And, in many cases, even if a plan sponsor did not add the COVID-related features themselves, the plan’s record keepers did so through negative response defaults. The upshot is many plans have incorporated the COVID-related provisions− so now what?

In contrast to the rushed decisions of the early COVID days, let’s step back and take the time to assess these provisions before the close of the year. Such an assessment can ensure the changes are administered correctly and coordinated between internal staff and service providers. Lastly, the changes need to be communicated to participants and documented in the plan’s records to insure the conforming amendments are done accurately.

To start, let’s revisit the CARES Act’s COVID-related provisions before we commence the CARES Act “clean-up in aisle 9.”

The CARES Act permitted plan sponsors to temporarily liberalize distribution and loan options for participants impacted by COVID-19. To take advantage of these features participants self-certify that they, or a family member, were impacted by COVID-19. Plan sponsors can rely on the self-certifications without additional inquiry.

The CARES Act permitted plan sponsors to implement COVID-related distributions (CRDs) of up to $100,000 from qualified plans, 403(b)s, simplified employee pension (SEP), savings incentive match plan for employees (SIMPLEs) and IRAs. Again, as noted above, a participant self-certifies he or she  qualifies for a CRD. CRDs have unique rules relating to taxation, withholding and rollovers. Specifically, CRDs need not be fully taxed in 2020. Rather, the individual may elect to spread the taxable income over three years, respectively. Next, the mandatory 20 percent withholding on eligible rollover distributions from qualified plans is waived. Lastly, the participant has a three-year window in which he or she may re-roll the CRD back into a qualified arrangement.

A second key provision of the CARES Act dealt with plan loans. Under the Act, the plan loan limitation was temporarily increased to the lessor of 100 percent of a participant’s account balance or $100,000. In addition, loan repayments can be temporarily suspended.

Okay, the next step for plan sponsors and committees is determining exactly which of the CARES Act provisions they affirmatively adopted and which were defaulted to by the record keeper. What did the committee decide to do? What was the record keeper told? What were the participants told? Did the record keeper notify the plan sponsor of CRD-related defaults that were implemented automatically? Clear documentation of the decisions or defaults is essential in order to ensure the plan is operated accordingly.  Once we’ve ascertained which COVID-related provisions apply, the next step is clearly documenting the decisions. Plan documents need not be amended until the end of the 2022 plan year and memories are often short. Therefore, we urge good documentation now of the precise decisions made so when formal amendments happen they are accurate. The Retirement Learning Center has a handy dandy worksheet that can help capture COVID-related decisions for the records. The worksheet can be found at CARES Act Pre-Amendment Checklist.

Once we have identified the CARES Act-related plan decisions, it is then time to ensure the plan’s stakeholders are aware of the decisions and to verify the plan operations are consistent with these decisions. Has there been communication with the record keeper to confirm it is aware of the elected COVID-related provisions? Is the TPA aware of the new provisions? Are the benefits and HR staff members clear regarding the elections and the implications for the participants? What communications have gone out or should go out to plan participants regarding these changes?

All of these questions should be asked and the responses documented in the plan’s records. Things were moving pretty fast earlier in the year. Let’s not assume everyone “got the memo.” A modest effort now in terms of a CARES Act “clean-up in aisle 9” will serve to save much time and effort when the conforming plan amendments are required to be executed.

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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Relief for Variable Rate PBGC Premiums

“My client is delaying a portion of her defined benefit plan contribution that is due in 2020 until January 1, 2021, as allowed under the Coronavirus Aid, Relief and Economic Security (CARES) Act. However, she already filed and paid her PBGC premiums for 2020, which showed an underfunding liability because of the delayed contribution. Consequently, she was required to pay more in variable rate premiums than she would have had to pay if she had made her contributions in 2020. Is she stuck with the higher variable-rate premium, or is there a way for her to get back the overpayment?”

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 New Jersey is representative of a common inquiry related to the payment of Pension Benefit Guaranty Corporation (PBGC) premiums.

Highlights of the Discussion

Yes, there is a way to get a refund of an overpayment in variable-rate premiums in this unusual situation. Fortunately, the PBGC realized the discrepancy that was created, and came up with a way to rectify the matter in its September 2020 Technical Update 20-2. Under this guidance, a prior year contribution received after the PBGC premium was filed and on or before January 1, 2021, may be included in the asset value used to determine the variable-rate premium. This relief did not change the premium due dates, however, (e.g., October 15, 2020, for calendar year plans), and does not permit a premium filing to reflect a contribution that has not yet been made. Therefore, plan sponsors that want to take advantage of this relief must amend their 2020 PBGC premium filing by February 1, 2021, to revise the variable-rate premium data to add in contributions due in 2020 that are made on or before January 1, 2021. Once the PBGC approves the amended filing, it will refund any excess variable-rate premium, or credit the excess to the plan’s “My Plan Administration Account” (whichever option the plan sponsor elects).

For a bit of background, the PBGC is the governmental entity that insures private sector defined benefit plans. All single employer defined benefit plans are required to pay a flat rate premium annually to the PBGC for coverage based on the number of participants in the plan. Additionally, for plans that are underfunded (i.e., where plan liabilities exceed assets), a variable-rate premium also applies based on the plan’s unfunded vested benefits (UVBs).

Conclusion

Plan sponsors who remitted their PBGC premiums on time for 2020, who also are delaying a contribution due in 2020 until January 1, 2021, pursuant to the CARES Act, may have become subject to or were required to pay higher variable-rate premiums because of the delayed plan contribution. Such sponsors may be entitled to a refund of some or all of the variable-rate premiums paid. They can reclaim an overpayment by submitting an amended PBGC premium filing by February 1, 2021, to claim a refund or credit.

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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August 31 Is 2020 RMD Rollover Deadline For Some

“Can you remind me of the key points related to the waiver of RMDs for 2020?”

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 Maryland is representative of a common inquiry related to the 2020 waiver of required minimum distributions (RMDs) and rollovers of such amounts.

Highlights of the Discussion

  • You ask a timely question as August 31, 2020, is a key deadline by which certain rollovers of 2020 RMDs must be accomplished.
  • Section 2203 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (CARES Act) waives RMDs for IRAs, defined contribution, 403(a) qualified annuity, 403(b) or governmental 457(b) plans for 2020.
  • Defined benefit plans are not covered by this wavier.
  • As an added bonus under the CARES Act, and as clarified by Notice 2020-51, a distributed amount that otherwise would have been an RMD for 2020 is eligible for rollover, including
    • First-year 2019 RMDs that were taken by April 1, 2020,
    • First-year 2020 RMDs due to be taken by an April 1, 2021; plus
    • Amounts that are part of a series of periodic payments (that include a 2020 RMD) made at least annually over life expectancy, or over a period of 10 or more years.[1]
  • The deadline for rolling over 2020 RMDs is the later of August 31, 2020, or 60 days after receipt of the distribution;
  • A 2020 RMD that is rolled over by the August 31, 2020, deadline does not count toward the one-rollover-per-12-month rule applicable to IRA-to-IRA rollovers;
  • Nonspouse beneficiaries also are allowed to roll over 2020 RMDs, if they do so by August 31, 2020; and
  • A 2020 RMD from a plan or IRA may be rolled back into the same plan or IRA (provided the plan permits incoming rollovers).

Conclusion

The CARES Act waives the necessity to take 2020 RMDs from IRAs and most qualified retirement plans. August 31, 2020, is a key deadline by which certain rollovers of 2020 RMDs must be accomplished. Please refer to IRS Notice 2020-51 for additional guidance.

 

[1] Not to be confused with substantially equal periodic payments exempt from the 10% early distribution penalty tax under IRC Sec. 72(t)

© Copyright 2021 Retirement Learning Center, all rights reserved
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401(k)s, the 2020 RMD Waiver and Rollovers

“My client was told by his human resources representative that the 401(k) plan from his former place of work will distribute his 2020 RMD from the plan this year as usual. I thought that under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, all RMDs were waived for 2020. Can you clarify, please?”

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 California is representative of a common inquiry related to required minimum distributions (RMDs) from 401(k) plans.

Highlights of the Discussion

The application of the IRS’s waiver of 2020 RMDs can be confusing for qualified retirement plans, because the plan sponsor can choose whether it will suspend all RMDs for 2020 or continue to distribute RMDs as usual under the terms of the plan.[1] Plans have the ability to distribute a participant’s plan balance without his or her consent once the assets are no longer “immediately distributable,” which is the later of the time a participant attains normal retirement age or age 62  [Treasury Regulation 1.411(a)-11(c)(4)].  Consequently, despite the IRS not treating the distribution as an RMD for 2020, a plan may continue to force the payment for the year. A likely reason would be to maintain consistent distribution processing procedures from year to year.

There is good news, however, for your client. Although, typically, RMDs are ineligible for rollover [IRC Sec. 402(c)(4)(B)], in this case, because the IRS does not consider the distribution as an RMD for 2020 (as a result of the CARES Act waiver), your client may roll over the amount —if it is otherwise eligible. (Note that the plan does not have to offer a direct rollover of the amount, nor withhold 20 percent for federal tax purposes. A 60-day, indirect rollover would still remain an option.)

Conclusion

Despite the temporary waiver of RMDs for 2020 allowed under the CARES Act, qualified plans may still choose to distribute such amounts. Therefore, it is imperative for participants and their financial advisors to know how their plans intend to address the optional 2020 RMD waiver and plan accordingly.

[1] The 2020 RMD waiver does not apply to defined benefit plans.

© Copyright 2021 Retirement Learning Center, all rights reserved
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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.

© Copyright 2021 Retirement Learning Center, all rights reserved
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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.

© Copyright 2021 Retirement Learning Center, all rights reserved