By Danielle K. Roberts
At press time Congress was hashing out Phase 4 of the COVID-19 stimulus program, but most Americans were still not sure how Phase 3, the CARES Act, benefits them. The $2.2 trillion stimulus package signed into law on March 27, 2020, includes several provisions aimed at seniors that go far beyond the one-time cash payments.
If you advise seniors and the soon-to-be-retired demographic, here is what you need to know to help them take advantage of CARES Act benefits for older Americans.
Automatic payments for non-filing Social Security beneficiaries
For most taxpayers, eligibility for the $1,200 individual stimulus payments is pegged to adjusted gross income (AGI) as reported in the 2018 or 2019 tax return. The IRS issued special guidance for non-filers, which include a significant number of Social Security beneficiaries; initially, they were required to submit a simple tax return to claim their stimulus check.
That provision has since been waived for Social Security beneficiaries. The IRS announced that it will automatically deposit stimulus checks into the bank account on file with the Social Security Administration—or mail a paper check for those without direct deposit—regardless of the beneficiary’s filing status. There is no additional paperwork burden for those currently receiving Social Security benefits.
Relaxed rules for retirement accounts
By mid-March, COVID-19 had wiped out over $7 trillion in value in the stock market—or about $22,000 per American. Current retirees and those approaching retirement are facing difficult decisions; 55% are rethinking their retirement plans.
It’s become clear that this isn’t a short-term financial blip and the recovery process could take years. For that reason, the CARES Act relaxes several restrictions involving withdrawals and loans from qualified retirement accounts.
No penalties on early withdrawals
The 10% penalty on withdrawals before age 59-½ has been waived for those affected by the coronavirus. In addition, the CARES Act suspends the mandatory 20% tax withholding that normally applies to early 401(k) distributions.
The Act does not eliminate the tax liability—account holders are still responsible for normal income tax on early distributions. However, the Act provides a lot of flexibility for managing it. Taxpayers can pay the entire amount with their 2020 return or spread the tax payments out over three years. Alternatively, they can repay the entire withdrawal within three years and avoid income tax on the early distribution altogether.
Withdrawals are limited to a maximum of $100,000 per individual regardless of the number of retirement accounts the person owns.
Larger loan amounts
The CARES Act doubles retirement account loan limits. Account holders can borrow up to $100,000 or 100% of their vested 401(k) account balance, whichever is less. The new rule applies to loans made through September 23, 2020.
The five-year repayment term still applies, but borrowers can defer loan payments until January 2021, although interest will accrue during the deferral period. The CARES Act does not include any specific provisions for loan repayment in the event the borrower loses his or her job. The revised repayment rules in the 2018 Tax Cuts and Jobs Act still apply and loans must either be repaid by the tax filing deadline or treated as a premature distribution.
Eligibility rules apply
Not everyone can take advantage of the relaxed guidelines. The legislation only provides relief to taxpayers directly affected by the novel coronavirus. Specifically:
- The account holder or spouse must be diagnosed with COVID-19 or
- The account holder must be laid off or furloughed due to coronavirus or be unable to work due to a lack of childcare because of COVID-19.
Individuals should be prepared to prove eligibility when they apply for a loan or take a premature withdrawal. Also, employers have the final say over whether to adopt the relaxed rules. Fidelity expects most plans to follow the federal guidelines, however, even though they are not binding on employers.
Suspended required minimum distributions
The Act suspends required minimum distributions (RMDs) for 2020 for all retirees and non-spousal heirs who would otherwise be required to take a distribution this year. Taxpayers who already took an RMD this year may be able to roll it over into another retirement account, but only if the distribution occurred within 60 days of the effective date of the CARES Act.
For example, an RMD taken in February 2020 could be designated as an eligible rollover distribution, but one taken in January would not be eligible.
It is possible that the IRS will issue a blanket extension at some point this year as they did during the 2009 RMD suspension. However, this is far from certain, so individuals who took their RMDs before the rollover deadline should plan accordingly. Also, any blanket extension that may be issued will not apply to non-spouse beneficiaries who already took their RMDs.
New Medicare rules
Medicare has been surprisingly responsive to the new healthcare guidelines for COVID-19. In addition to expansive new benefits for telemedicine services, the Centers for Medicare and Medicaid Services have issued COVID-specific coverage rules to comply with CDC recommendations for seniors.
The CARES Act directs all Medicare Part D prescription drug plans to lift quantity restrictions that limit a beneficiary’s ability to obtain a three-month supply of medications. This directive allows seniors to comply with the CDC guidelines.
In addition, all COVID-19 related treatment is covered by Medicare, including hospitalization for quarantine purposes. In the past, Medicare wouldn’t cover hospital days once a patient was medically able to be discharged. Now, however, Medicare will cover an extended hospital stay to comply with COVID-19 quarantine guidelines.
Finally, the CARES Act directs Medicare to cover the COVID-19 vaccine, once it becomes available, at 100% regardless of deductible status. Medicare beneficiaries will have no out-of-pocket costs for the coronavirus vaccine.
Enhanced Medicaid benefits
Prior to passage of the CARES Act, Medicaid was prohibited from covering the services of direct support professionals while a beneficiary was hospitalized. The Act removes this prohibition and expands Medicaid benefits to cover home- and community-based direct support services during hospitalization.
This ensures continuity of care for the elderly and those with disabilities who are hospitalized due to COVID-19.
Keep up with the news
The news is changing daily and, in some cases, hourly. It is important to keep up with news on this as it evolves and impacts the communities we serve. By staying current on news and sharing it with your clients, you not only keep them in the know but also add value in ways they never expect.
K. Roberts is a founding partner at boomerbenefits.com and a Medicare Supplement Accredited Advisor. She and her team help thousands of baby boomers learn the ropes regarding Medicare every year. Reach her at: firstname.lastname@example.org, 1 (817) 249-8600.