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How Retirement Planning Changes In 2021 After The New COVID-19 Relief Package

How Retirement Planning Changes In 2021 After The New COVID-19 Relief Package

January 02, 2021

The new COVIDTRA laws do not have nearly the number of retirement changes or law modifications as the SECURE Act or CARES Act, but it does create a few new retirement planning considerations and strategies for 2021 and beyond.

Within the last 12 months, we have essentially seen the passage of three major pieces of federal legislation that impact retirement planning. Far and away the biggest retirement planning bill of the three was the SECURE Act, passed at the end of 2019, and mostly going into effect in 2020. However, due to COVID-19 and the ensuing CARES Act, the SECURE Act likely hasn’t gotten the attention it needs.

The SECURE Act dramatically changed the rules about when inherited retirement accounts need to be distributed and moved the beginning date for RMDs to age 72, up from 70.5. The CARES Act, designed to provide relief during the pandemic, waived most RMDs for 2020, created the coronavirus-related distribution for 2020, and expanded 401(k) loan options for those impacted by the pandemic.

Now, just before the end of the year and with many of the CARES Act provisions about to or already having expired, the Consolidated Appropriations Act of 2021 was passed. As part of the overall appropriations bill, the COVID-Related Tax Relief Act of 2020 (COVIDTRA) was also passed, which was designed to bring expanded unemployment benefits, relief payments, business loans and new tax benefits to the millions of Americans struggling during the pandemic.

The new act does not have nearly the number of retirement changes or law modifications as the SECURE Act or CARES Act, but it does create a few new retirement planning considerations and strategies for 2021 and beyond.

Creation of Qualified Disaster Distributions

First, a bit of background on a CARES Act provision: As part of the CARES Act, Congress created an exception to code 72(t), Sec. 2, waiving the 10% early withdrawal penalty tax for distributions prior to age 59.5 from certain retirement accounts like IRAs and 401(k)s for COVID-19-related distributions.

This Coronavirus Related Distribution (CRD) Exception, simply put, allowed for up to an aggregate amount of $100,000 to be drawn from retirement accounts per individual from January 1, 2020, to December 30, 2020, and not be subject to a penalty tax for early withdrawal as long as the individual or spouse was diagnosed with COVID-19 or had adverse financial consequences due to COVID-19. You can find a full list of qualifying descriptions on the IRS website . As such, December 30, 2020, was the last day to take a CRD, and Congress did not extend this exception into 2021. However, if you took a retirement distribution in 2020 and otherwise would qualify for a CRD, but you didn’t notify your plan provider at that time of the distribution it would be a CRD, it is still possible to qualify for the exception. The taxpayer will just need to properly document and report the exception at tax time using form 8915-E.

The CRD also had two new interesting features. First, distributions were treated as taxable, but spread out ratably over a three-year period so the total tax burden would not be felt in 2020. Additionally, you can repay the CRD over that three-year period. If you do so, it is treated as a direct rollover back in 2020, the year of distribution, and no taxes are owed on the distribution at all since it was repaid.

Congress, in COVIDTRA, passed new legislation creating a similar and permanent retirement plan distribution exception called the Qualified Disaster Distribution. This allows for a similar set up as the CRD – up to $100,000 aggregate per qualified disaster can be withdrawn from retirement accounts and avoid the 10% penalty tax. The amounts can be repaid and be treated as an eligible rollover any time during the three-year period beginning on the day after the distribution was taken.

The amount will be treated as taxed over a three-year time period unless the taxpayer elects to have it taxed in the distribution year. Additionally, if this distribution is coming from a qualified employer plan like a 401(k), it is not subject to the normal 20% mandatory withholding rules if properly identified as a qualified disaster distribution. Instead of focusing on COVID-19 impact like with the CRD, to qualify under COVIDTRA you must have primarily resided in a qualified disaster area and you must have sustained an economic loss from the qualified disaster.

Expanded Retirement Plan Loans

Many retirement accounts that have employee salary deferrals allow for plan loans as a way to give access to funds and encourage participation in the retirement plan. However, ERISA imposes very strict rules on the amount and type of loan that can be available from retirement plans such as a 401(k).

Typically, plan loans can be 50% of your vested account balance up to $50,000. The CARES Act expanded this to up to the lesser of $100,000 or 100% of your vested account balance. As part of COVIDTRA, Congress extended this provision into 2021. However, in order to qualify you must meet the qualified individual guidance of residing in a qualified disaster area and suffering an economic loss from said disaster. This again shifted focus away from specifically COVID-19 related impact and onto qualified disaster relief. Further, the provision allows for a one-year delay of loan repayments, for existing or new loans.

A Look Ahead

Ultimately, the newest bill did not use retirement accounts or retirement laws as a source of continued COVID-19 relief. Instead, the changes mostly focused on allowing more flexibility in the future as it relates to potential qualified disasters. This does open up long-term access and flexible planning when it comes to retirement assets.

The lack of retirement planning provisions also raises a question, at least in my mind, if Congress is preparing a retirement related bill early in 2021. A bi-partisan bill was floated just a few months ago that could come back in 2021. This would make sense, perhaps, if it signals a desire for a larger retirement bill in the near future.

Regardless, retirement planning continues to change, from the SECURE Act to the CARES Act and now COVIDTRA. Make sure you are staying on top of your options and building the best plan to fit your unique goals and challenges.

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