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Posts Tagged ‘IRAs’

The New CARES Act Allows Pandemic Victims to Borrow from Their 401(k)s and IRAs Without Penalty and Defer Required Minimum Distributions

Posted on: March 30th, 2020

By: Greg Fayard

The federal Coronavirus Aid Relief and Economic Security (CARES) Act signed into law March 27, 2020, includes retirement tax relief for victims of the pandemic—namely victims’ 401(k)s and IRAs.

Under section 2202 of the $2 Trillion law (which amends the IRS code), victims under 59 and a half may withdraw up to $100,000 (or the entire balance if less than that) from their retirement accounts (401(k)s and Individual Retirement Accounts (IRAs)) WITHOUT paying the normal 10% penalty as long as they pay back the withdrawn amount within three years.

But who qualifies as a Coronavirus victim and can take advantage of this provision? To qualify, individuals (or their spouse or dependent) needs to be diagnosed with the COVID-19 disease, or experienced adverse financial consequences from being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of child care stemming from the pandemic. Any early Coronavirus-triggered withdrawals, however, would be taxed depending on the individual’s income and tax bracket, which usually falls in the 20% to 25% range. Hence, while the Coronovirus-sanctioned withdrawals avoid the normal 10% penalty, it does not permit tax-free withdrawals (unless the withdrawal is from a Roth 401(k)). 

Borrowing from your 401(k), however, regardless of the penalty, should be a last resort—especially now, considering the steep decline in retirement account balances resulting from the pandemic. With a turbulent stock market likely in the near future given the extension of the federal “slow the spread” protocols to April 30, 2020, only the most desperate should consider an early 401(k) withdrawal, even if the 10% penalty is temporarily waived for 2020.

There is also tax relief for required minimum distributions under the CARES Act. The recently enacted Setting Every Community Up for Retirement Enhancement (SECURE) Act (enacted December 20, 2019, taking effect January 1, 2020), provides retirees who turned 72 before April 1, 2020, who have traditional IRAs or a 401(k), must take minimum distributions, or RMDs, by the end of the year. If they don’t take their Required Minimum Distribution, they will be penalized 50% of the RMD amount. The RMD is subject to federal income tax. For those who turned 70 and a half in 2019, the RMDs would normally have to be taken by this April. 

Additional Information: 

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis.  On April 2, we will discuss the impact of Coronavirus on law enforcement.  Click here to register.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients. Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the Coronavirus pandemic, including issues related to Labor & Employment, Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments. For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER: The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19. The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement. We can only give legal advice to clients. Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG. An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest. As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce educational content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such. We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.** 

Has Fiduciary Rule Suffered a Fatal Blow?

Posted on: April 4th, 2018

By: Theodore C. Peters

The Employee Retirement Income Security Act of 1974 (“ERISA”) defined a “fiduciary” as someone who provides investment advice for a fee.  The following year, the U.S. Department of Labor (“DOL”) promulgated regulations that provided a five-part test for assessing whether someone was a fiduciary as defined by ERISA.  Seeking to implement a uniform fiduciary rule for all retail investment accounts, the DOL issued the Fiduciary Rule on April 6, 2016.  The Fiduciary Rule re-defined who is an “investment advice fiduciary” under ERISA and heightened the fiduciary duty to a “best interest” standard for those clients with ERISA plans and IRAs.  Previously, brokers were bound only to make “suitable” recommendations.  The Fiduciary Rule also created a “Best Interest Contract Exemption” that permitted financial advisors to avoid penalties stemming from prohibited transactions so long as they contractually affirmed their fiduciary status.

Several industry groups brought suit against the DOL, opposing implementation of the Fiduciary Rule.  In 2017, the United States District Court for the Northern District of Texas, in an 81-page ruling, ruled in favor of the DOL.  Chief Judge Barbara M.G. Lynn concluded that the DOL had not exceeded its authority and had not created a private right of action for clients. On March 15, 2018, in Chamber of Commerce v. United States Department of Labor, the Court of Appeals for the Fifth Circuit invalidated the Fiduciary Rule in a 2-1 decision.

In reversing the lower court, the Court addressed a simple but critical issue: whether the DOL exceeded its rulemaking authority by expanding the definition of “investment advice fiduciary.” The Court concluded that the new definition was in conflict with ERISA and the Internal Revenue Code because it was inconsistent with the common meaning of “fiduciary.”  The Court noted that the DOL arbitrarily and improperly sought to broaden the scope of its authority through the concept of investment “advice,” that included products sold by financial salespersons and even insurance agents. Further, the Court criticized the best interest contract exemption, which permitted brokers to receive compensation for investment products they recommend (thereby creating potential conflicts), provided they agree by contract to act in the investor’s “best interests.”

By vacating the Fiduciary Rule under the Administrative Procedures Act, the Fifth Circuit effectively voided the entire rule nationwide.  The DOL could possibly request a hearing en banc before the entire Fifth Circuit, or alternatively, petition for a writ of certiorari to the United State Supreme Court.  Or perhaps, the DOL will take no action at all, in which case the Fiduciary Rule will presumably die on the vine, and the five-step test enunciated in 1975 would be resurrected. Of note, however, mere days before the Fifth Circuit’s decision, the Tenth Circuit ruled in favor of the DOL in the context of a more limited challenge to the Fiduciary Rule highlighting a split between federal circuits – which may in turn spur the DOL to seek Supreme Court review.

Regardless of what action the DOL takes, the Securities Exchange Commission (“SEC”) is likely to seek to implement its own rules.  Commencing in October 2017, the SEC began reviewing the DOL’s Fiduciary Rule with a goal of introducing its own new rule governing investment advice.   SEC Chairman Jay Clayton testified before the Senate Banking Committee that the drafting of an SEC rule that harmonizes with the DOL’s Fiduciary Rule was a priority.  Despite the Fifth Circuit ruling, the SEC’s resolve appears to remain steadfast.  During a Q&A session at the SIFMA compliance conference just days after the ruling, Jay Clayton said “I’m not sitting on this… [and] as far as I’m concerned, we’re moving forward.”

If you have questions or would like more information, please contact Ted Peters at [email protected].