The COVID-19 global pandemic has had a direct impact on the lives of everyone around the world. To help address the resulting financial devastation felt by individuals, businesses, and other entities, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was signed into law by the president on March 27. The CARES Act is intended to provide economic relief to those who've been impacted by COVID-19. Some of the provisions directly affect retirement account owners.

While many are familiar with the stimulus checks that were mailed to millions of individuals and the emergency business loans administered by the Small Business Administration, what some may not know is that the act also has provisions designed to help people in other ways. Let's take a look at the impact to retirement plan provisions.

Financial Recovery Time

One of the retirement plan provisions eliminated required minimum distributions from certain retirement accounts, including IRAs (and inherited IRAs) and defined contribution plans (such 401(k)s and 403(b)s) In many respects, this provision is akin to one in the Worker, Retiree, and Employer Recovery Act, which was enacted during the 2008-2009 financial crisis.

In both cases, the aim was to allow individuals to skip taking required withdrawals — such as an IRA distribution — so that their retirement account balances could potentially recover from significant market declines. Otherwise, they faced the stress of being forced to liquidate holdings that were down significantly and then having to pay taxes on what was withdrawn.

The "Freebie" for Retirement Account Holders

Fortunately, many markets have rebounded sharply since March, suggesting that the rule change has, thus far at least, been somewhat of a "freebie" for many retirement account holders. Indeed, the procrastinators who put off taking their first required 2019 calendar-year distributions until this year's April 1 deadline benefited even more: They were effectively allowed to skip two years of distributions instead of one.

However, not everyone stands to benefit from the measure. As roughly 80 percent of Americans who are taking required distributions take more than the minimum amount, rely upon these distributions to supplement other income sources or provide the cash flow for living expenses.

But this doesn't take away from the fact that the measure was beneficial for many. Even those who took a distribution sometime during the first quarter — before the impact of COVID-19 was clearly evident — were able to capitalize on the changes. Some IRA owners returned their distributions under the 60-day rollover rules. However, since the CARES Act passed in March, the IRS has issued additional guidance relaxing the normally stringent 60-day rollover rules. Now, IRA owners that took an RMD earlier in the year have until August 31, 2020 to return unwanted RMDs. That includes RMDs that did not initially meet the 60-day rollover rules as well as RMDs taken by Inherited IRA beneficiaries.

Coronavirus-Related Distributions

In addition to eliminating required retirement account withdrawals during 2020, a second group of provisions in the CARES Act allows for the special treatment of what many refer to as Coronavirus-Related Distributions, or CRDs. Under certain circumstances, retirement account owners can make withdrawals of up to $100,000 on a potentially tax-efficient basis. According to the Act, those wishing to take a CRD must demonstrate that they have been either physically or financially affected by the coronavirus.

To qualify based on the physical standard, an individual, their spouse or a dependent — must have been tested and medically diagnosed with COVID-19. If they lack evidence to this effect, their 2020 distributions aren't eligible.

On the other hand, those who can demonstrate a financial hardship as a result of COVID-19 have a lower hurdle to qualify, as hardships may include:

• Quarantining;
• Getting furloughed, laid off or having their work schedules shortened;
• Having to close their business or cut its open hours or
• Being unable to work because they couldn't arrange child care.

Three Key Benefits of CRD

As with any big legislation, the CARES Act brings with it some uncertainty, and we expect it is likely we will continue to see new guidance issued by the IRA over the remainder of the year regarding all of the rules attributable to the Act. Nevertheless, signs point toward a broad interpretation of who has been affected financially in some adverse way. This suggests that a sizable number of retirement account holders will be eligible to take a Coronavirus-Related Distribution and take advantage of the associated benefits, which include the following:

1. No early withdrawal penalties. Typically, distributions to those under 59-1/2 are subject to a 10 percent early withdrawal penalty, but that's not the case for CRD. Eligible recipients who withdraw up to $100,000 will only be liable for income taxes on the funds they receive.
2. Ability to spread the income associated with CRD over three years. The income attributable to a CRD can be evenly apportioned over the three-year tax period from 2020 through 2022. Recipients who prefer to have the distributions taxed in 2020 can choose that option instead.
3. Ability to return CRDs over three years and avoid having them deemed taxable. Those who take a CRD have the option of returning the funds at any time during the 2020-2022 span. However, distributions are subject to tax until repaid, after which amended returns must be filed to claim back any over payments.

These various measures represent a valuable benefit for those who need or want to take a Coronavirus-Related Distribution from their retirement plans during 2020. Keep in mind that the rules may be subject to change, and everyone's situation is different. Set up a meeting with your Boston Private advisor to stay on top of the latest developments and determine what course of action would be best for you.