IRA UPDATES

Both the SECURE Act, passed in December 2019, and the CARES Act, passed in March 2020, have affected significant changes for both Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs). While the SECURE Act provided the most comprehensive retirement reform package in over a decade and its provisions are permanent changes, the CARES Act specifically addresses unique challenges and considerations during the COVID-19 crisis.

CORONAVIRUS RELATED DISTRIBUTIONS (CRDs)
Qualified individuals include those diagnosed with COVID-19, those whose spouse or dependent is diagnosed with COVID-19, or those who experience adverse financial consequences due to any of the following related to COVID-19, such as being quarantined, furloughed, or laid off; having work hours reduced; or being unable to work because of lack of child care.

CRDs repaid within a three-year period will be considered to have met the 60-day rollover requirement. These withdrawals will be taxed over a three-year period, unless the individual elects otherwise. Please consult a tax advisor.

CONTINUATION OF SECURE ACT (updated December 2022)
SECURE 2.0 Act of 2022 contains numerous changes affecting IRAs in 2023, 2024, and beyond. Outlined below are the changes that will take effect in 2023.

Increased RMD Age

1. RMD age changes from age 72 to age 73 (and will change again to age 75 in 2033)
2. Applicable to individuals turning age 72 in 2023 or later
3. Individuals who turned age 72 in 2022 are not affected by this change and are still required to receive their RMD
4. Individuals turning age 72 in 2023 will not have an RMD until 2024
5. Required beginning date (RBD) to receive the first RMD is still April 1 of the following year

Reduced Excess Accumulation Penalty

1. Penalty for missing an RMD reduces from 50% to 25%
2. 25% penalty is further reduced if the missed RMD is taken within a “correction window” that ends the earlier of the
   1. mailing of a notice of deficiency;
   2. the date on which the penalty tax is assessed; or
   3. the last day of the second taxable year following the year in which the penalty is imposed

Qualified Charitable Distributions (QCDs)

1. Owners have a one-time election to make a QCD to a “split-interest entity” (maximum amount: $50,000)
2. Qualifying “split-interest entities” include
   1. Charitable remainder annuity trusts (funded exclusively with QCDs)
   2. Charitable remainder unitrusts (funded exclusively with QCDs)
   3. Charitable gift annuities (fixed payments of 5% or greater within 1 year)
   4. Additional requirement/restrictions apply
3. Financial organizations report these types of QCDs the same; however, the check is made payable directly to the “split-interest entity”

New 10% Penalty Tax Exception for Terminal Illness

1. Exception applies to early distributions made after a physician’s certification of the individual’s terminal illness
2. Terminal illness is defined in IRC Section 101(g)(4)(A) (substituting 84 months for 24 months)
3. Distributions are eligible for repayment to the IRA within three years

New Roth Option for SEP and SIMPLE IRAs

1. SEP Roth Option
   1. Employer contributions can be made
   2. Deferrals under grandfathered SAR-SEP deferrals may also be made
2. SIMPLE Roth Option
   1. Employee deferrals allowed
   2. Employer match/nonelective not allowed
3. IRS model documents have not yet been updated to incorporate these changes, so further guidance is expected from the IRS and will be communicated when available

Removal of 10% Early Withdrawal Penalty on Net Income Attributable (NIA)

1. NIA being removed from a distribution that is made by an owner under age 59½ is no longer subject to 10% early withdrawal penalty

Repayment Deadline for Qualified Birth or Adoption Distributions Released

1. Owners have three years to repay any distributions taken due to a qualified birth or adoption
2. Distributions taken before this enactment must be repaid by 12/31/2025 

New Permanent Rule for Qualified Disaster Recovery Distributions

1. Up to $22,000 may be removed and may be exempt from the 10% early withdrawal penalty
2. Amount taken may be included in taxable income ratably over three years
3. Amount taken may be repaid to the IRA within three years of the distribution
4. Repayment of certain first-time homebuyer IRA distributions allowed in disaster situations

Updated Guidance for Special Needs Trusts Beneficiary Distributions

1. Definition of “Applicable Multi-Beneficiary Trusts” (AMBT) is expanded
2. Type II AMBT is now defined to accommodate special needs trusts that include qualifying charitable organizations, whereas the original definition only covered “individuals”