COVID-19: A Roadmap to Relief for IRA Owners and Providers

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.

IRA OWNERS AND BENEFICIARIES MAY SKIP REQUIRED MINIMUM DISTRIBUTIONS IN 2020

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.

IRA DEADLINES EXTENDED TO JULY 15, 2020

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.

• Deadline to Make 2019 Annual IRA Contribution. The deadline for all Traditional and Roth IRA owners to make annual IRA contributions for 2019.
• Deadline to Remove 2019 IRA Excess Contributions to Avoid 6% Excise Tax. The deadline for an IRA owner to remove 2019 excess contributions (along with taxable earnings) on a tax-free basis from his or her IRA to avoid the 6% excise tax on excess contributions.
• Deadline to Report and Pay 10% Tax for 2019 Early Distributions. The deadline for IRA owners to report and pay the 10% additional tax for early distributions taken in 2019. Although IRS Notice 2020-23 does not specifically provide that this deadline is extended, it would appear to be covered by the broad relief provided in the Notice, and it is specifically addressed in frequently asked questions and answers issued by the IRS titled Filing and Payment Deadlines Questions and Answers.[1]
• Deadline to Recharacterize Traditional and Roth IRA Annual Contributions. The deadline for IRA owners to recharacterize 2019 annual contributions made to a Traditional IRA as an annual contribution to a Roth IRA and vice a versa.
• Deadline for IRA Form 990-T. The deadline for an IRA trustee or custodian to file Form 990-T with the IRS to report unrelated business taxable income (UBTI) generated by an IRA.
• Deadline for IRS Form 5498. The May 31, 2020 deadline for an IRA trustee, custodian, or issuer to file Form 5498 with the IRS and provide a copy to IRA owners and beneficiaries for 2019.
• 60-Day Deadline for Rollovers. The 60-day deadline for rolling over distributions received from eligible retirement plans and IRAs on or after February 1, 2020 through May 15, 2020 is extended to July 15, 2020, as long as the IRA owner has not completed another 60-day rollover within a 12-month period and satisfies other applicable rollover requirements. This rollover relief also apples to IRA owners who took distributions on or after February 1, 2020 through May 15, 2020 that would have otherwise been RMDs in 2020, but would not apply to IRA owners who received a distribution in January 2020. Additional IRS guidance is necessary to extend the 60-day rollover period for IRA owners who received distributions that would have been RMDs in January 2020.
• Tax Filing Deadline for SEP and SIMPLE IRA Employer Contributions for 2019. The tax filing deadlines (including extensions) for employers for contributions to SEP and SIMPLE IRAs.
• SEPP Deadline. The deadline for an IRA provider to make substantially equal periodic payments (SEPPs) from an IRA under a SEPP arrangement.
• 120-Day Deadline to Buy First Home to Avoid 10% Tax for Early IRA Distribution. The 120-day deadline for an IRA owner to buy his or her “first-time” home under the “first-time home purchase” exception to the 10% additional tax on early distributions.
• Deadline to Repay Qualified Reservist Distributions to an IRA. The two-year deadline after an active duty period ends for a plan participant or an IRA owner to repay a “qualified reservist distribution” to an IRA.

COVID-19 SUFFERERS MAY TAKE TAX-FAVORED DISTRIBUTIONS FROM IRAS

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.[2] 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:

• IRA Providers Report Distributions on Form 1099-R. The Coronavirus Relief Q&As indicate that IRA providers must report coronavirus-related distributions on Form 1099-R and that this reporting is required even if the IRA owner repays the coronavirus-related distribution in the same year.
• IRA Owners Report Repayments on Form 8915-E. The Coronavirus Relief FAQs provide that IRA owners who repay coronavirus-related distributions will use Form 8915-E to report any repayment and to determine the amount of any coronavirus-related distribution includible in income for a year. The Coronavirus Relief FAQs also indicate that the Form 8915-E is expected to be available before the end of 2020.
• IRA Owners May Be Required to Amend Returns for Tax Refunds. In addition, the Coronavirus Relief FAQs provide that an IRA owner may be required to file an amended income tax return to claim a refund of the tax attributable to the repaid coronavirus-related distribution previously included in income.

The following questions remain open on how to report the coronavirus-related distributions and repayments:

• Report Entire Coronavirus-Related Distribution on Form 1099-R in Year #1? Does the Form 1099-R issued for the year of distribution report the entire amount of the coronavirus-related distribution as taxable? Or will a separate Form 1099-R be required for each year of the three-year income inclusion period?
• New Code to Report Coronavirus-Related Distributions? It is also not clear whether there will be a new code for reporting coronavirus-related distributions on Form 1099-R or whether the distributions will be coded using an existing code. If future IRS guidance is similar to the Hurricane Katrina guidance, then IRA providers will be permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R to report coronavirus-related distributions.
• Report Coronavirus-Related Repayments Based on Reasonable Reliance? Because an IRA owner may repay any portion of a coronavirus-related distribution within three years and the repayment is not treated as an annual IRA contribution, it is important for the IRA provider to have a way for the IRA owner to distinguish between an annual IRA contribution and a repayment of a coronavirus-related distribution when making the repayment. If the future IRS guidance is similar to the Hurricane Katrina guidance, IRA providers will be able to rely on reasonable representations from the IRA owner that he or she meets the conditions necessary to make a repayment of a coronavirus-related distribution and treat the repayment as a direct transfer.
• New Code to Report Coronavirus-Related Repayment? It is also not clear whether a new code for reporting the repayment on IRS Form 5498 will be added or whether the repayments will use an existing disaster code.

A WORD ABOUT IRA AMENDMENTS

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.

NEXT STEPS FOR IRA PROVIDERS

IRA providers may want to consider taking the following steps:

• Notify IRA owners and beneficiaries of the COVID-19 relief provided by the CARES Act and IRS Notice 2020-23
• Send a follow-up letter to IRA owners who were age 70½ or older in 2019 and received RMD letters in January 2020 informing them that they had to take RMDs in 2020 (as required by law at the time of the Notice), that no RMDs are now required in 2020
• Put procedures in place for IRA owners and beneficiaries with RMD installment payments in place to notify the IRA provider whether they want to take or skip RMDs in 2020
• Review IRA forms and communications and update as needed to reflect the relief. This may include adding language to distribution and contribution forms for IRA owners to specify a coronavirus-related distribution or repayment and to certify that the IRA owners are eligible for the distribution (including that they have not exceeded the $100,000 limit) and repayment
• Address any operating system restrictions that would prevent or complicate applying the relief and related required coding for reporting purposes

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. Find resources on how to cope with the post-pandemic reality on our NOW. NORMAL. NEXT. page and our COVID-19 page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts, and download our biweekly COVID-19 Legal Issue Compendium.

Contacts

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:

Chicago
Marla J. Kreindler
Julie K. Stapel

New York
Craig A. Bitman

Philadelphia
Robert Abramowitz
William Marx

Washington, DC
Lindsay Jackson
Daniel Kleinman
Michael Richman