Category Archives: Retirement Plans

IRS Releases Guidance for Retirement Plan Related Relief under the CARES Act

As discussed in our prior blog post, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides special relief provisions for individuals in relation to their retirement plans. The provisions of the CARES Act, however, created uncertainties for both plan administrators and individuals when dealing with the administration of their respective retirement plans. On June 22 and June 23, the IRS issued Notice 2020-50 and Notice 2020-51, respectively, which provide guidance related to treatment of coronavirus-related distributions and the 2020 waiver of required minimum distributions (“RMDs”). On July 17, the IRS issued News Release 2020-162 to remind individuals about the CARES Act relief related to RMDs.

Notice 2020-50: IRS Guidance on Coronavirus-Related Distributions

Notice 2020-50 expands the definition of a qualified individual (i.e. the individuals who are able to take advantage of the retirement plan related relief provided under the CARES Act) and provides helpful guidance for reporting coronavirus-related distributions from retirement plans. As a reminder, a coronavirus-related distribution is a distribution from an eligible retirement plan to a Qualified Individual (defined below) between January 1, 2020 and December 30, 2020.

Definition of a Qualified Individual

As provided in an IRS News Release, the definition of qualified individual, as expanded under Notice 2020-50, 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    • having a job offer rescinded or start date for a job delayed due to COVID-19.

This expanded definition will allow more individuals to reap the benefits associated with receiving coronavirus-related distributions.

Reporting a Coronavirus-Related Distributions

For the Qualified Individual to receive favorable tax treatment, the Qualified Individual must report the distribution on his or her for Form 1040 (Individual Income Tax Return) (if applicable) and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments) for 2020. Form 8915-E is expected to be available before the end of 2020. The favorable tax treatment includes the waiver of the 10-percent additional tax, the allowance of the pro-rata inclusion in income, and recontribution benefits. For more information on these benefits, please see our prior blog post.

If the Qualified Individual recontributes his or her coronavirus-related distributions to an eligible retirement plan, the method to report such recontribution depends on whether the Qualified Individual elected to include the coronavirus-related distribution ratably over a 3-year period. If the Qualified Individual reports the entire coronavirus-related distribution in the year of distribution and recontributes such distribution in a later year, the Qualified Individual is required to file a revised Form 8915-E (and amended Form 1040, if applicable).

If the Qualified Individual instead elects the ratable inclusion, then the amount of the recontribution will decrease the amount of the coronavirus-related distribution included in income for that year. The recontribution will be reported on Form 8915-E. Further, if a Qualified Individual recontributes an amount that is greater than the amount included in gross income for the taxable year, the excess recontribution amount may be carried forward, or carried back, to reduce the amount of the coronavirus-related distribution included in income in the future year, or prior year, respectively.  If the excess recontribution amount is carried back, a revised Form 8915-E (and amended Form 1040, if applicable) must be filed.

Notice 2020-50 also provides detailed guidance for plan administrators for retirement plan loans.

Notice 2020-51: IRS Guidance on Waiver of Required Minimum Distributions

As discussed in our prior blog post, the CARES Act provides a waiver of RMDs from certain retirement accounts. This new waiver rule may certainly be beneficial for individuals who wish for their retirement plan funds to grow tax-deferred in 2020; however, it also created uncertainty, especially in relation to options for rollovers.

Fortunately, Notice 2020-51 provides that distributions from a retirement plan that would have been an RMD but for the CARES Act are eligible for rollover into an eligible retirement plan, as long as other general rollover requirements are met. Further, an IRA owner or beneficiary who already received an amount that would have been an RMD but for the CARES Act may repay such distribution to the distributing IRA. Such repayment will be treated as a rollover for income tax purposes, which means the owner or beneficiary will not have to pay income tax on the distribution.

Generally, an individual must rollover a payment within 60 days to avoid tax and penalties and is only allowed one rollover within a 12-moth period. In Notice 2020-23, the IRS previously extended the rollover deadline to July 15 for RMDs distributed after January 2020. To provide further relief for individuals who already received distributions in 2020, Notice 2020-51 provides a special rule that the deadline to rollover a payment described above is extended to August 31, 2020. Thus, pursuant to Notice 2020-51, individuals who received distributions in January are now also eligible for rollover relief.

Further, these rollovers will not count towards the one rollover per 12-months limitation and are not restricted by the general rule against rollovers for non-spousal beneficiaries.

Notice 2020-51 also provides information related to the SECURE Act, guidance about plan amendments, and advice regarding other various issues addressed by FAQs.

Attorney Colton F. Castro contributed to this blog post.

Why Individuals Should Care About the CARES Act: Retirement Plans and Charitable Contributions

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various relief provisions for individuals, including provisions that benefit individuals in relation to their retirement plans and that provide an increase in allowable charitable deductions. Continue reading

Using your Rollover IRA to Buy Yourself a Job? Think Twice and Carefully!

A common retirement / employment technique that looks enticing is to rollover your substantial 401(k) account after terminating employment to an IRA and then use the IRA to purchase or start up a business for you to run.  What could be better?  A job for you, a profitable investment for your IRA that you control, and the investment funds remain tax deferred in the IRA.  What an excellent idea!  No, not so much!

While this business start-up technique may look like the perfect use of your accumulated retirement funds, there are a lot of technicalities that can cause the arrangement to blow up, triggering huge taxes and penalties.  The 8th Circuit Court of Appeals (in Ellis v. Commissioner) recently confirmed that such an arrangement done through an IRA disqualified the entire IRA (making the entire IRA taxable).  The taxpayer owed taxes and penalties amounting to more than 50% of the IRA’s value.

In the case reviewed by the court, the IRA owner caused the IRA to purchase 98% of a used car sales business and then used his control of the company to have the company pay him compensation for his services running the business. The court held that the IRA owner’s exercise of control over the company causing the company to pay him compensation violated the tax law’s prohibited transaction rules for the IRA.  The holding resulted in the IRA’s loss of tax deferred status as to all funds in the IRA.  The prohibited transaction rules that the court said were violated was direct or indirect use of the plan’s income or assets for the benefit of the IRA owner as well as dealing with the IRA’s income or asses for his own interest.

The 8th Circuit case involved investment in the business start-up by the taxpayer’s IRA.  Similar techniques are offered through C corporation business start-ups.

While it is clear that an IRA investment of this nature is extremely dangerous, often destroying the tax deferred status of the IRA, the same technique can be successful if done in a C corporation using the corporation’s qualified plan instead of the IRA.  But there are significant expenses and dangers involved. Individuals should not consider this technique unless the investment funds involved are large enough to justify the expense and risk, and the individual has a high tolerance for details and complications.

To use the this business start-up technique in a C corporation, the typical approach is first transfer the rollover funds into a qualified plan established by the new start-up business and then have the qualified plan purchase stock in the business that is sponsoring the qualified retirement plan.  The IRS and DOL calls these types of transactions “ROBS” for “rollover business startup”.  While we do not assist clients in creating ROBS arrangements we routinely assist clients in understanding the risks and rewards inherent in the arrangements.

Carol L. Myers
cmyers@williamsparker.com
941-893-4001