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The CARES Act and your investment accounts

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. Since then, the IRS has issued several Notices with additional information and guidance related to the CARES Act. This expansive legislation has wide-ranging implications. Changes to tax rules applicable to retirement plans and accounts comprise a significant component of the CARES Act. The information below highlights key provisions in addition to how we are supporting our clients with the relief. This information is subject to change if we receive further guidance from the IRS.

The CARES Act includes provisions for employer-sponsored qualified* retirement plans and IRAs that:

  • permit an additional withdrawal of up to $100,000 for coronavirus-related distributions (CRDs),
  • for employer-sponsored qualified plans such as 401(k)s, permit an increase in the available loan amount to the lesser of 100% of a participant's vested account balance or $100,000 and provide relief from loan repayments, and
  • waive required minimum distributions (RMDs) for 2020 and 2019 RMDs, taken after 1/1/2020 that were required to be taken by April 1, 2020.
  • update the use of High Deductible Health Plans (HDHPs), Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs).

Each of these provisions is explained in detail below. Note that Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

1. Tax-favored coronavirus-related distributions (CRDs) from qualified retirement plans and IRAs

Coronavirus related withdrawals of up to $100,000 (in the aggregate) from qualified retirement plans (such as 401(k)s, that choose to permit them) and IRAs during 2020 may receive special tax treatment.

  • Clients under age 59½ can withdraw up to $100,000 in the aggregate from specified qualified retirement plans and IRAs during 2020 without a 10% early withdrawal additional federal income tax, if the individual meets coronavirus-related eligibility requirements (see below).
  • The 20% mandatory federal income tax withholding is waived for coronavirus-related distributions (CRDs) from qualified retirement plans.
  • Unless you elect to include taxes in the year of distribution, CRDs will be included in your income for federal income tax purposes ratably over 3 years. Note that state and local income taxes may not be subject to this delayed tax treatment. Consult your tax advisor for more information on your personal circumstances.
  • CRDs may be repaid to a qualified retirement plan in which you participate or an IRA (in one or more payments) at any time during the 3-year period beginning on the day after the date on which the distribution was received, and those repayments will be treated as a tax-free rollover, without regard to any annual contribution cap. We anticipate guidance regarding the tax treatment of taxes that were previously paid on CRDs in the event all or a portion of a CRD is repaid during such 3-year period. Non-spouse beneficiaries may be eligible for a CRD and the 3 year tax spread, but they are not permitted to rollover/repay a CRD.

Eligibility: As authorized under the CARES Act, on June 19, 2020, the IRS issued IRS Notice 2020-50 expanding the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 coronavirus on the individual's spouse or household member.

As expanded under Notice 2020-50, a qualified individual is anyone who:

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, "COVID-19") by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • experiences adverse financial consequences as a result of the individual, the individual's spouse, or a member of the individual's household (that is, someone who shares the individual's principal residence):
    • being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
    • being unable to work due to lack of childcare due to COVID-19;
    • closing or reducing hours of a business that they own or operate due to COVID-19;
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

For purposes of applying these additional factors, a member of the individual's household is someone who shares the individual's principal residence.

What does this mean for me?

If you take a CRD in 2020, you may be required to report this withdrawal when you file your federal income tax return for 2020. You should consult your tax advisor on your personal situation.


2. Waiver of required minimum distributions

Under the CARES Act, all 2020 RMDs have been waived. There are no coronavirus eligibility requirements associated with this change. For 2020 distributions that were RMD payments prior to the law change, the following relief is available to restore these funds to a plan or IRA:

  • 2019 RMDs that were not taken before January 1, 2020 and that were required to be taken by April 1, 2020 are also waived.
  • Distributions received as RMDs in 2020 are eligible for rollover.
  • The 60 day rollover period for distributions that would have been RMDs but for the CARES Act waiver taken after December 31, 2019 and prior to July 2, 2020 has been extended to August 31, 2020.
  • Distributions taken after July 1, 2020 are subject to the regular 60 day rollover rule.
  • For IRAs, waived RMDs taken from beneficiary accounts may be recontributed to the distributing inherited IRA account by August 31, 2020. The one-rollover-per-year rule applicable to IRAs does not apply to the repayments of these RMDs to the distributing account by August 31, 2020.
  • Should you wish to receive the amount that would have been your RMD (or another amount), you may still take the RMD


What does this mean for me?

If you have not taken your RMD yet, and you have the RMD Service set up to automatically distribute your RMD, and you do not wish receive the automatic distribution(s), you'll need to contact us to update the RMD Service distribution date.


3. Loans from qualified retirement plans (coronavirus-related loans)

The CARES Act has two optional relief provisions for qualified retirement plans that offer loans. If a plan chooses to add these optional provisions, participants must first certify that they meet the coronavirus eligibility guidelines, which are the same as for CRDs (described above).

Currently the limit for loans from a qualified retirement plan is 50% of a participant's vested account balance or $50,000, whichever is less. Under the CARES Act, plans that choose to take advantage of the expanded loan limitations may allow for loans up to 100% of a participant's vested account balance or $100,000, whichever is less. This is a temporary provision and is only permitted for loans that are made during the 180-day period beginning on the date of enactment, which was March 27, 2020.

Qualified retirement plans can also choose to offer a one-year suspension on loan repayments due between March 27 and December 31, 2020. CRDs and both the expanded loan limit and the loan payment suspensions are optional provisions for employer plans. Participants in an employer plan that offers CRDs and/or expanded loan provisions need only to self-certify that they meet one of the coronavirus-related eligibility requirements. Plan sponsors may accept the self-certification of eligibility unless they have actual knowledge, at the time of the distribution or loan request, that the participant does not meet one of the eligibility requirements.

What does this mean for me?

If you participate in a qualified retirement plan that offers loans and you are interested in a coronoavirus-related loan or delaying repayments on an existing loan, contact your plan sponsor for more information on whether these provisions will be available to you.


4. Use of HDHPs, HSAs, FSAs, HRAs
HDHPs and HSAs

  • HDHPs may provide telehealth or other remote services before the deductible is satisfied without disqualifying employees from HSA eligibility.
  • The rule is effective for plan years that begin on or before December 31, 2021.
  • IRS Notice 2020-15 has also indicated that plans covering Coronavirus related testing and treatment will not disqualify an individual who is otherwise eligible for an HSA.


Health FSAs, HRAs, and HSAs

  • Expenses for over the counter drugs incurred on or after January 1, 2020 no longer need a prescription to qualify as “medical care” for purposes of these account-based plans.
  • Employer sponsors of Health FSAs and HRAs who want to allow such reimbursement may need to amend their Health FSAs and/or HRAs.
  • Beginning January 1, 2020, menstrual products also qualify as “medical care.”


5. Tax filing and retirement contribution extension

In addition to the CARES Act provisions, the IRS has postponed the traditional April 15 federal income tax filing and payment deadline by three months to July 15. "During the three-month postponement, taxpayers won't be subject to interest or penalties for filing after April 15," says Mitchell Drossman, National Director of Wealth Planning Strategies for the Chief Investment Office of Merrill and Bank of America Private Bank.

The IRS has also provided guidance regarding the delayed deadline for deposit of IRA contributions for the 2019 tax year. "Contributions can be made to your IRA, for a particular year, at any time during the year or by the due date for filing your return for that year. Because the due date for filing Federal income tax returns has been postponed to July 15, the deadline for making contributions to your IRA for 2019 is also extended to July 15, 2020." 1 This also extends the time you have to make an additional contribution to your HSA for 2019 to July 15. The 2019 maximum contribution limits still apply.

The IRS continues to issue guidance on taxpayer relief, so please check with the IRS's Filing and Payment Deadlines Q&A site for the very latest information. As always, it's best to consult your tax advisor for guidance on what the tax extension might mean for you.

6. 529 re-contribution guidelines

Generally, if a client receives a refund from an educational institution, the client has the ability to re-contribute the refunded amount to the 529 account within 60 days of the date the client received the refund. However, under the temporary IRS extension, if that 60-day period ends on or after April 1, 2020 and before July 15, 2020, then the re-contribution can be completed any time before the later of July 15, 2020 or the 60th day after the date of the refund.

For example, if a client made a tuition payment on January 1, 2020, and received a refund check on April 1, 2020, the 60-day period would end on June 1, 2020. However, under the temporary extension, the client would have until July 15, 2020, to recontribute the funds to their 529 account.

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* Generally, a qualified plan is a plan defined under Internal Revenue Code Section 401(a). Examples are 401(k), Individual 401(k), Profit Sharing, etc. Qualified plans, such as 401(k) plans, IRAs and profit-sharing plans, must meet the standards of the Employee Retirement Income Security Act (ERISA).

While not considered “qualified” under IRC 401(a), employer-sponsored business IRAs, including Simplified Employee Pension (SEP) IRAs and SIMPLE IRAs are described in Section 408 of the Tax Code and are subject to IRA rules.

1, Q17. Note that the IRS FAQ site cautions that the answers are not citable as legal authority

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Opinions are those of the author(s) and are subject to change.

The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management ("GWIM") clients, is part of the Investment Solutions Group ("ISG") of GWIM, a division of Bank of America Corporation.


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