The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and recent formal and informal guidance from the Internal Revenue Service (IRS) provide important 2020 relief for owners and beneficiaries of individual retirement accounts and individual retirement annuities (IRAs) and IRA providers in response to the coronavirus (COVID-19) pandemic.
To help preserve retirement assets in the midst of the steep market decline generated by the COVID-19 pandemic, the CARES Act permits IRA owners to skip required minimum distributions (RMDs) that they would have been required to take in 2020 from their IRAs, including 2019 RMDs due on April 1, 2020 for IRA owners who turned age 70½ in 2019. Beneficiaries of deceased IRA owners may also skip RMDs that they would have been required to take from their inherited IRAs in 2020. This relief applies to Traditional, SIMPLE and SEP IRAs and inherited Traditional, Roth, SIMPLE and SEP IRAs. No RMD relief is necessary for Roth IRA owners because they are not required to take RMDs from their Roth IRAs during their lifetimes. An IRA owner or beneficiary may still take RMDs that would otherwise have been due in 2020. This RMD relief is similar to relief provided in 2009 in response to the market decline during the Great Recession of 2008.
All or any portion of a distribution to an IRA owner that would have been an RMD in 2020 (except distributions made in January 2020) may be rolled over to an eligible IRA or eligible retirement plan within 60 days after receipt, if the one-rollover-per-12-month-period limitation for rollovers between IRAs is met, along with any other applicable rollover requirements. IRS Notice 2020-23 extends the last day of the 60-day rollover period until July 15, 2020 for any distribution, including a distribution that would have otherwise been an RMD in 2020, made on or after February 1, 2020 and on or before May 15, 2020. There has been no extension of the 60-day rollover period for distributions made in January 2020 and these distributions are not eligible for rollover, absent further relief. The IRS Notice 2020-23 deadline extensions are discussed further below.
All or any portion of a distribution to a spouse IRA beneficiary from an inherited IRA that would have been an RMD in 2020 is also eligible for rollover to the spouse beneficiary’s own eligible IRA or eligible retirement plan within 60 days of receipt, if other applicable rollover requirements are satisfied. The 60-day rollover period extension under IRS Notice 2020-23 described in the preceding paragraph would also apply to rollovers made by spouse beneficiaries.
A distribution to a non-spouse beneficiary from an inherited IRA that would have been an RMD in 2020 is not eligible for rollover, absent further relief, because distributions to non-spouse beneficiaries from inherited IRAs are not eligible for rollover under current law.
To provide relief from certain IRS deadlines during the COVID-19 emergency, IRS Notice 2020-23 (by reference to IRS Revenue Procedure 2018-58) extends the deadlines for IRA owners and beneficiaries and IRA providers to take certain actions, including the actions listed below, that were or are otherwise due (originally or under a valid extension) on or after April 1, 2020 and before July 15, 2020 until July 15, 2020.
To assist IRA owners who have suffered from COVID-19 (either physically or financially) in accordance with certain requirements, the CARES Act permits Traditional, SIMPLE and SEP IRA owners to take tax-favored “coronavirus-related distributions” of up to $100,000 from their IRAs. The coronavirus-related distribution is very similar to tax-favored distribution relief provided to IRA owners in the wake of Hurricane Katrina.
Presumably, coronavirus-related distributions are also available to Roth IRA owners, although given the after-tax nature of Roth IRAs they may not reap as many tax benefits from the distribution as Traditional, SIMPLE or SEP IRA owners. It is also not clear at this time whether coronavirus-related distributions are available to IRA beneficiaries with inherited IRAs, but making the distributions available to inherited IRAs would be consistent with IRS guidance (discussed below) issued in connection with Hurricane Katrina. Hopefully, the IRS will confirm that coronavirus-related distributions are also available to Roth IRAs and inherited IRAs.
To be eligible for a coronavirus-related distribution, an IRA owner (or the IRA owner’s spouse or dependent) must have tested positive for COVID-19 using a CDC-approved test. An IRA owner is also eligible for the coronavirus-related distribution if the IRA owner experienced adverse financial consequences due to an inability to work because of any one of a specified list of COVID-19-related reasons or the closing or reduction in hours of a business owned or operated by the IRA owner. It is not clear if an IRA owner who is receiving substantially equal periodic payments (SEPPs) may take a coronavirus-related distribution without being considered to have modified the SEPPs. If the coronavirus-related distribution is considered a modification to the SEPPs the IRA owner could be subject to significant adverse tax consequences.
The $100,000 limit is applied in the aggregate to all of an individual’s IRAs and qualified retirement plans, 403(b) plans and eligible 457(b) plans. The coronavirus-related distributions are exempt from the 10% early distribution tax penalty and taxed ratably over three years (unless the IRA owner elects immediate taxation) and repayable within three years. Repayments are not taxable and are treated as direct trustee-to-trustee transfers made within 60 days. The repayments are required to be to an IRA or eligible retirement plan to which a rollover of the original distribution could have been made, but is not subject to the one-rollover-per-12-month-period limitation on rollovers between IRAs. Because repayments of the coronavirus-related distributions must meet rollover requirements, repayments cannot be made to inherited IRAs absent IRS guidance to the contrary. Banning repayments of coronavirus-related distributions to inherited IRAs would be consistent with Hurricane Katrina IRS guidance.
Coronavirus-related distributions were available beginning on January 1, 2020 and continue to be available until December 30, 2020.
The IRS recently issued frequently asked questions and answers titled Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers (Coronavirus Relief FAQs) that shed some light on coronavirus-related distribution repayments and other aspects of the relief. The Coronavirus Relief FAQs indicate that the Treasury Department and the IRS intend to issue formal guidance on the CARES Act in the near future and that this guidance will likely apply principles similar to those provided in Notice 2005-92 in connection with Hurricane Katrina relief. The Coronavirus Relief FAQs provide the following insights on reporting coronavirus-related distributions and repayments:
The following questions remain open on how to report the coronavirus-related distributions and repayments:
The CARES Act requires amendments to reflect the RMD relief and coronavirus-related distributions to any “plan” or “annuity contract” by the last day of the first “plan year” beginning on or after January 1, 2022, or such later date prescribed by the Secretary of the Treasury. In the past, the IRS has consistently not applied similar legislative amendment requirements to IRA custodial/trust agreements or annuity contract IRA endorsements. The IRS typically issues guidance at some point (sometimes long after the legislation!) specifying whether IRA amendments are needed at all and, if so, the deadline for making the IRA amendments. The amendment process for IRA custodial/trust agreements and annuity contract IRA endorsements is complicated by the fact that IRA providers must rely on IRS-approved prototype agreements and endorsements or model forms issued by the IRS. Of course, IRA disclosure statements may be updated at any time without IRS approval.
IRA providers may want to consider taking the following steps:
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Craig A. Bitman
 Please note we are referencing the FAQs last updated as of April 29, 2020, understanding that the IRS may subsequently update them and that while the answers to the FAQs are not citable as legal authority, they provide helpful insights into IRS policies and interpretations of tax law.
 Please note we are referencing the FAQs last updated as of May 4, 2020, understanding that the IRS may subsequently update them and that while the answers to the FAQs are not citable as legal authority, they provide helpful insights into IRS policies and interpretations of tax law.