4 CARES Act Misconceptions
By Ian Berger, JD
IRA Analyst
The Coronavirus Aid, Relief and Economic Recovery Act (CARES Act) was signed into law on March 27. It includes several important retirement-related provisions. Because some of these provisions are confusing, several CARES Act misconceptions have arisen. In this edition of the Slott Report, we will attempt to set the record straight.
Misconception #1: Everyone is eligible for a CRD.
The CARES Act allows individuals to withdraw up to $100,000 of IRA and company plan funds during 2020 with special tax breaks. They are called “coronavirus-related distributions” (CRDs). However, not everyone is eligible to take these withdrawals. Nor does everyone qualify for the relief. Under current rules, you’re eligible only if you’re in one of these categories:
- SARS-CoV-2 or COVID-19 virus diagnosis by a test approved by the CDC;
- you or your spouse or dependent is diagnosed; or
- you experience “adverse financial consequences” due to:- being quarantined;- being furloughed or laid off or having work hours reduced;- being unable to work due to lack of child care; or- closing or reducing hours of a business you owned or operated.
The law gives the IRS the authority to expand these categories, but that has not happened yet.
Misconception #2: Company plans must allow CRDs.
Although the CARES Act allows companies to allow CRDs, companies are not required to offer them. This is true even when you are in one of the above categories. Many plans offer CRDs. However, to make sure, remember to check with your HR Department or the plan administrator.
Misconception #3: CRDs are tax-free.
If you are under age 59 ½, your CRD is exempt from the 10% early distribution penalty. However, the CRD is generally subject to federal taxes. One of the relief provisions allows you to spread out federal income taxes over three years. In addition, you can avoid federal taxes by repaying the CRD to an IRA or company plan within three years of receiving it.
Misconception #4: Any RMD received in 2020 can be paid back.
Another provision of the CARES Act waives required minimum distributions (RMDs) for 2020. This includes 2020 RMDs and 2019 RMDs if you reached age 70 ½ in 2019 and delayed your 2019 RMD into 2020.
You can roll certain RMDs back to an IRA or company plan. Normally you must complete rollovers within 60 days. However, if you received (or will receive) an RMD between February 1 and May 15, 2020, you have until July 15, 2020 to roll it over. But you don’t qualify for an IRA rollover if you had another IRA rollover during the 12 months before receiving your RMD. Non-spouse beneficiaries who received an RMD from an inherited IRA do not qualify.
You are currently out of luck if you received your RMD in January of this year. But it is possible the IRS will issue broader rollover relief, so keep checking the Slott Report.
