By Mark Miller
CHICAGO (Reuters) – The $2 trillion economic stimulus package racing toward passage in the U.S. Congress contains several important relief provisions for retirees, and for younger workers saving for retirement.
Most of these provisions do a good job targeting help for middle- and lower-income households that will need help most during the crisis. Here is a rundown of the most important retirement-related provisions contained in the CARES Act, which sailed through the U.S. Senate on Wednesday and is expected to be approved by the U.S. House of Representatives on Friday. I have also given my “report card” grade to each provision.
Enrollees in Social Security retirement and disability benefits will receive the same one-time $1,200 stimulus payments that are being sent to most adults, subject to the same income limitations ($75,000 in adjusted gross income for single filers and $150,000 for joint filers). Lesser amounts will be paid to people with adjusted gross income over those ceilings. Recipients of Supplemental Security Income, a program for people with very low incomes, also will receive the payments.
Lawmakers and the White House had been discussing a holiday on payroll taxes that fund Social Security. “That would have left out jobless and people receiving Social Security,” said David Certner, legislative policy director for government affairs at AARP. “So we were pushing for direct payments.” (The law does contain a payroll tax holiday for the employers’ share of Social Security payroll taxes for the remainder of 2020, and employers have up to two years to repay the owed taxes.)
The payments will be structured as income tax rebates – like a refund of taxes that you paid, so they will not be taxable. Details are not available yet on how the payments will be made, but they may be added to already-scheduled electronic payments and are expected to be sent in early April, according to Certner.
Grade: A. For the most part this is well-targeted relief, since most Social Security beneficiaries have low or moderate income – this year the average retirement benefit is just $1,500.
401(k) LOAN EXPANSION
The CARES Act doubles to $100,000 the current limit on loans from 401(k) and similar tax-deferred retirement plans for participants diagnosed with the novel coronavirus or who are affected by related economic losses. Participants with existing loans can delay any repayments due in 2020 for one year.
Under existing law, the plan sponsor (your employer) has discretion to approve these loans, notes Ed Slott, an expert and author on retirement saving. “Anyone can take a loan, but the amounts are at the discretion of the sponsor.”
Grade: B. This is a reasonable way to provide liquidity to households during the crisis, but it is not risk-free. Loans are tax-free unless you fail to repay – any remaining balance is taxed as ordinary income, and a 10% penalty is due for those under age 59-1/2 for taking an early distribution. Since you are borrowing from yourself, no harm, no foul – we hope.
401(k) HARDSHIP WITHDRAWALS
The bill permits people affected by the virus or related economic circumstances to make withdrawals from workplace plans and IRAs up to $100,000 this year without the usual 10% penalty due for people under age 59-1/2. Income taxes are still due on the withdrawn amounts, but the law allows you to spread out this liability over three years. You also have the option to redeposit the withdrawn sums during that period.
Grade: C. This should be viewed as a last-resort “Hail Mary” move. From a policy standpoint, it sends a signal that draining a 401(k) is on par with many of these other moves, when it stands to hurt people in the long run.
Many low- and middle-income households do not have these accounts in the first place, and even if they do, their balances usually are far lower than $100,000.
“It’s more likely to serve as a tax-planning tool for wealthy individuals than a lifeline for the middle class,” said Shai Akabas, director of economic policy for the Bipartisan Policy Center. “This is an emergency situation, but we already have an underlying retirement security problem, so sending the signal that it’s OK to make yourself less financially secure to gain more security today is not ideal public policy.”
REQUIRED MINIMUM DISTRIBUTIONS
The law suspends the need to take required minimum distributions (RMDs) from tax-deferred accounts for retirees, or others who have inherited an IRA. Normally, you are required starting at either age 70-1/2 (for those born before July 1, 1949) or 72 (for those born after June 30, 1949), to start drawing down a percentage of account balances and pay income tax on the amounts. Failing to take your RMDs will get you a 50% penalty on the amount you should have taken.
Grade: B. RMDs this year are based on the value of your holdings as of Dec. 31 last year – when the market was much higher. Allowing retirees to retain a bit more of their savings makes sense right now.
“If this hadn’t been waived, you’d be taking out a larger share from your IRA and paying tax on value that no longer exists,” Slott said.
However, he notes the change will not have a broad impact. “It’s a good provision, but it’s not as helpful as you might think – the government’s own data indicates that 80% of people subject to RMDs take more than the minimum anyway, because they need the money. So I guess this will help people who don’t need the help.”
EXTENDED REFILLS AND VACCINE COVERAGE
The Centers for Disease Control has been recommending that people have a three-month supply of prescription medications on hand during the crisis, but Medicare Part D drug plans typically limit the amounts that can be ordered. Medicare already had asked Part D plans to lift these restrictions during the crisis, but this will be required under the CARE Act.
A recent Kaiser Family Foundation analysis (https://bit.ly/2QL8b4q) found that most Medicare Part D enrollees are in plans that cover extended supplies of low-cost generic drugs, but just under half are in plans that cover extended supplies of brand-name drugs.
Another provision requires Medicare to cover any future coronavirus vaccine under Part B (outpatient services), rather than Part D with no cost sharing to beneficiaries.
Grade: A. Need I say more?
(Reporting by Mark Miller in Chicago; Editing by Matthew Lewis)