How retirement plans will change in 2021 after the new COVID-19 relief package

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In the past 12 months, we’ve seen essentially three major federal laws being passed that affect retirement planning. By far the largest law on pension planning was the SECURE Act, which was passed in late 2019 and will mostly come into force in 2020. However, due to COVID-19 and the subsequent CARES Act, the SECURE Act likely didn’t get the attention it needs.

The SECURE Act dramatically changed the rules of inheritance Retirement accounts must be distributed and the start date for RMDs moved from 70.5 to 72 years. 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) credit options for those affected by the pandemic.

Now, shortly before the end of the year and since many provisions of the CARES Act are about to expire or have already expired, the Group Funds Act of 2021 has been passed. As part of the Global Grant Act, the COVID-Related Tax Relief Act of 2020 (COVIDTRA) was also passed, protecting the millions of Americans who died during the pandemic.

The new law doesn’t include nearly as many pension changes or legislative changes as the SECURE Act or CARES Act, but it does create some new considerations and strategies for planning retirement for 2021 and beyond.

Creation of qualified disaster distributions

First, some background information on a provision of the CARES Act: As part of the CARES Act, Congress made an exception to Code 72

This coronavirus-related distribution (CRD) exemption allowed, simply put, up to a total of $ 100,000 per person from January 1, 2020 to December 30, 2020, and is not subject to early retirement penalties while on the person or spouse Has been diagnosed with COVID-19 or has had adverse financial consequences as a result of COVID-19. You can find a full list of qualifying descriptions on the IRS website. Therefore, December 30, 2020 was the last day a CRD was filed and Congress did not extend this exemption until 2021. At this point, inform your plan provider of the distribution that it is a CRD, it always is still possible to qualify for the exception. The taxpayer only has 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 distributed proportionally over a period of three years so that the entire tax burden would not be felt in 2020. In addition, you can repay the CRD over this three-year period. If you do, it will be treated as a direct rollover into the year of distribution 2020 and no tax will be owed on the distribution since it was repaid.

Congress passed a new law in COVIDTRA to create a similar exception for the distribution of retirement plans known as qualified disaster distribution. This allows for a similar setup to the CRD – up to $ 100,000 per qualifying disaster can be deducted from retirement accounts and the 10% penalty tax avoided. The amounts can be repaid at any time during the three-year period from the day after the distribution and treated as a creditable extension.

The amount is treated as taxed over a period of three years unless the taxpayer decides to have it taxed in the year of distribution. In addition, if this distribution is from a Qualified Employer Plan such as a 401 (k), it will not be subject to the normal mandatory 20% deduction rules if properly identified as a Qualified Disaster Distribution. Rather than focusing on the impact of COVID-19 as with the CRD, to qualify under COVIDTRA you must have lived primarily in a qualified disaster area and you must have suffered economic loss from the qualified disaster. The QDD must be distributed by June 25, 2021 for a disaster that occurred between December 28, 2019 and December 27, 2020. The IRS recently added instructions for anyone wanting to report a CRD or QDD for 2020 here.

Extended Retirement Loans

Many employee deferred retirement accounts allow plan loans to gain access to funds and encourage participation in the retirement plan. However, ERISA has very strict rules on the amount and type of loan that can be obtained from retirement plans such as 401 (k).

Typically, Plan Loans can be 50% of your balance in your Prepaid Account up to $ 50,000. CARES law has extended this to up to $ 100,000, or 100% of your balance on your balance. As part of COVIDTRA, Congress has extended this provision to June 25th until 2021. To qualify, however, you must complete the qualified individual guidance to live in a qualified disaster area and suffer economic damage from that disaster. This shifted the focus again away from the specific effects of COVID-19 and towards qualified disaster relief. In addition, the provision provides for a one-year postponement of loan repayment for existing or new loans.

A look ahead

Ultimately, no retirement accounts or retirement laws were used as a source of ongoing COVID-19 relief in the latest law. Instead, the changes mainly focused on allowing more flexibility in relation to potentially qualified disasters. Although this opens up long-term access and flexible planning for retirement assets, it is limited in time.

The lack of provisions on retirement provision also raises a question, at least in my eyes, when Congress drafts a bill on retirement in early 2021. A bipartisan bill was tabled just a few months ago that could come back in 2021 if it signals the desire for a higher pension bill in the near future.

Regardless of this, pension planning continues to change from the SECURE law to the CARES law and now COVIDTRA. Make sure to keep an eye on your options and come up with the best plan to meet your unique goals and challenges.


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