The CARES Act Frequently Asked Questions (FAQs) Part 2
Providing More Clarity and Details on Specific Benefits
This email is the second in part of a series of emails to provide clarity and more details on specific benefits that have been made available to many many citizens in the recently passed CARES Act.
This email focuses on Retirement Accounts, Taxes and Student Loans and here are the frequently Asked Questions and Answers:
- Coronavirus related distributions are distributions of up to $100,000, made from IRAs, employer sponsored retirement plans (401(k), 403(b) or 457(b)), or a combination of both, which are made in 2020 by an individual who has been impacted by the Coronavirus.
Have you been impacted and do you qualify for a Coronavirus-Related Distribution?
- Answer: If any of the following apply to you then you have been impacted
- Have been diagnosed with COVID-19;
- Have a spouse or dependent who has been diagnosed with COVID-19;
- Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
- Are unable to work because they lack childcare as a result of the disease;
- Own a business that has closed or operate under reduced hours because of the disease; or
- Meet some other reason that the IRS decides to say is OK.
- Distributions are exempt from the 10% penalty, not subject to mandatory withholding requirements, are eligible to be repaid over 3 years, and the income may be spread over 3 years.
How are Coronavirus-Related Distributions treated if you are eligible?
- Exempt From the 10% Penalty – Individuals under the age of 59 ½ may access retirement funds without the normal penalty that would otherwise apply.
- Not Subject to Mandatory Withholding Requirements – Typically, eligible rollover distributions from employer-sponsored retirement plans are subject to mandatory Federal withholding of at least 20%. Coronavirus-Related Distributions, however, are exempt from this requirement. Plans can rely on a participant’s self-certification that they meet the requirements of a Coronavirus-Related Distribution when processing a distribution without mandatory withholding.
- Eligible to be Repaid Over 3 Years– Beginning on the day after an individual receives a Coronavirus-Related Distribution, they have up to three years to roll all or any portion of the distribution back into a retirement account. Furthermore, such repayment can be made via a single rollover, or multiple partial rollovers made during the three-year period. Finally, if distributions are rolled using this option, an amended return can (and should) be filed to claim a refund of any tax paid attributable to the rolled over amount.
- Income May Be Spread Over 3 Years – By default, the income from a Coronavirus-Related Distribution is split evenly over 2020, 2021, and 2022. A taxpayer can, however, elect to include all of the income from a Coronavirus-Related Distribution in their 2020 income.
How are Loans from Employer-Sponsored Retirement Plans affected?
- Answer: If you have been impacted using the same qualifications as Coronavirus-Related Distributions then loans from a 401(k) or a 403(b) will the following enhancements for you:
- Maximum Loan Amount is Increased to $100,000 – In general, the maximum amount that may be borrowed from an employer plan is $50,000. The CARES Act doubles this amount for affected individuals.
- 100% of the Vested Balance May Be Used – In general, once an individual has a vested plan balance that exceeds $20,000, they are only eligible to take a loan of up to 50% of that amount (up to the normal maximum of $50,000). The CARES Act amends this rule for affected individuals, allowing them to take a loan equal to their vested plan balance, dollar-for-dollar, up to the $100,000 maximum amount.
- Delay of Payments – Any payments that would otherwise be owed on the plan loan from the date of enactment through the end of 2020 may be delayed for up to one year.
- Required minimum distributions (RMDs) are waived in 2020, and taxpayers who have already taken their RMDs for 2020 have the option of returning them, if they so desire.
Are you required to take a RMD from my 401(k), 403(b), 457(b), or IRA in 2020?
- Answer: No.
- If you already took your RMD can you put it back into your retirement account?
- Answer: Yes. You can either do a 60-day rollover or roll it back into the account within three years from the date of the RMD distribution.
- 2020 is ignored for the purposes of the 5-year rule that applies to non-designated beneficiaries (e.g. charities, estates, non-see-through trusts) who inherit a retirement account from decedents who die prior to reaching their required beginning date.
How does this affect these situations more specifically?
- Answer: In general, such beneficiaries must distribute the entirety of their inherited assets by the end of the fifth year after the retirement account owner’s death. The CARES Act, however, allows 2020 to be ignored, or simply not counted as one of those five years. Thus, for Non-Designated Beneficiaries subject to the 5-Year Rule who inherited from a decedent dying between 2015 – 2019, the 5-Year Rule is effectively a 6-Year Rule.
- New $300 above the line deduction for “qualified charitable contributions,” and the AGI limit for cash charitable contributions has been temporarily repealed.
How are your charitable contributions treated for 2020 for tax purposes?
- If you are Standard Deduction on your 2020 Federal Taxes you can claim a $300 above the line deduction for charitable contributions made in cash.
- Your AGI limit on cash contributions made to charities is temporarily increased from a maximum of 60% of AGI (previously increased from 50% by the TCJA), to a maximum of 100% of AGI for “qualified contributions”. As such, you can completely wipe out your 2020 tax liability with charitable contributions. If total charitable contributions exceed the 2020 100%-of-AGI limit (so, effectively, once you have brought your 2020 income tax liability to $0), the excess may be carried forward as a charitable contribution for up to 5 years.
- Student loan payments deferred until September 30, 2020, and employers can exclude student loan repayments from compensation.
What does this mean for your current student loans?
- Student Loan Payments Deferred Until September 30, 2020 – Section 3513 suspends required payments on Federal student loans through September 30, 2020. During this time, no interest will accrue on this debt. Unfortunately, though, while required payments are suspended, voluntary payments are not prohibited. And by default, payments will continue unless individuals take proactive measures to contact their loan provider and pause payments.
- Also notable is that this period of time will continue to count towards any loan forgiveness programs. As such, any student borrower who intends to qualify for a program that will ultimately forgive the entirety of their Federal student debt (such as via the Public Service Loan Forgiveness program) should immediately pause payments. Because whereas other borrowers who continue to pay Federal student loans during this time may simply be paying down what is effectively 0% debt (at least temporarily), those borrowers who will ultimately have their outstanding student debt forgiven (upon completion of whatever requirements are necessary for their particular loan forgiveness program) are paying down a debt that would otherwise be wiped clean anyway!
- Finally, all involuntary debt collections are also suspended through September 30, 2020. This not only includes wage garnishment or the reduction of other Federal benefits but the reduction of any tax refund (for student loan purposes). As such, borrowers of student debt who are delinquent on payments and would normally be subject to a reduction of their tax refund have an incentive to file their tax returns early enough so that the refund is processed before this relief expires.
- Employers Can Exclude Student Loan Repayments From Compensation – Section 2206 provides employers a (very) limited window of time in which they can take advantage of a special rule to aid employees paying down student debt. In general, amounts paid by an employer to an employee which are used to pay student debt (or payments made by an employer directly to the loan provider) are considered compensation to the employee and are subject to income tax.
- Under Section 2206, however, employers have from the date of enactment of the law, through the end of the year, to provide employees with up to $5,250 for purposes of student debt payments and exclude those amounts from their income. This amount, however, is coordinated with the ‘regular’ $5,250 limit that employers can provide employees tax-free for current education. As such, the total maximum tax-free education assistance an employer can provide an employee in 2020 is $5,250.
- Pell Grant and Subsidized Federal Student Loan Relief For Students Leaving School – Both Pell Grants and Subsidized Federal Student loans are subject to various limits. Section 3506 of the CARES Act excludes from a student’s period of enrollment any semester that a student does not complete due to a qualifying emergency. Section 3507 does the same with respect to the Federal Pell Grant duration limit.
- Curiously, both provisions are contingent upon the Secretary of Education being “able to administer such policy in a manner that limits complexity and the burden on the student.” Upon first glance, these provisions would appear to create far more “burden” for the Secretary of Education than they do on the student!
- Finally, if a student withdraws from school during the middle of a semester (or equivalent) because of qualifying emergency, Section 3508(b) eliminates the amount of a student’s Pell Grant that would normally have to be returned, while 3508(c) cancels any Direct loan that was taken to pay for the semester.
As you can see, there is a great deal of information to digest with the recently signed CARES Act.
Hopefully, these summary points will give you guidance on what’s included and how it may affect you in your unique situation.
We’ll continue to go through the 880 pages and communicate more in the future.
Thank you for reading.
Here’s to everyone’s good health.
Your Client First Team,