CARES Act Changes for COVID-19 Relief

March 27, 2020

Congress passed the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) on Friday, March 27, 2020. This two trillion dollar bill provides economic relief to Americans in the midst of the global COVID-19 pandemic. The provisions of the bill relating to retirement plans are designed to provide immediate financial relief to participants who are experiencing financial difficulty by providing broader access to eligible retirement plan funds.

Below are the key provisions in the CARES Act relating to qualified retirement plans.

Hardship Distributions

Individuals are permitted to withdraw up to $100,000 from their retirement accounts with the option to repay the money they withdrew within three years to essentially restore their retirement savings in the plan. Congress also waived the 10% penalty tax for early withdrawals from a retirement plan or IRA.

There are a few of conditions: the withdrawal must be from an eligible retirement plan, so a 401(k) or profit-sharing plan, or an IRA, and the distribution must qualify as a “coronavirus related distribution.” Lastly, the distribution must occur in the 2020 calendar year.

A coronavirus related distribution is one in which:

  • An individual is diagnosed with COVID-19, or
  • A spouse or dependent is diagnosed with COVID-19, or
  • An individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
  • Any other factor as determined by the Treasury Secretary

Employers can rely upon a certification from an employee stating that the distribution was a coronavirus related distribution.

Income Inclusion and Repayment of COVID-19 Distributions

The distribution would be included in an individual’s taxable income ratably over a three-year period, unless the participant opted to have the withdrawal taxed in the year of distribution.

A participant also has the option of repaying the COVID-19 related withdrawal to an eligible retirement plan within three years of the distribution. The repayments would not be subject to the retirement plan contribution limits.

Temporary Loan Limit Increase

The CARES Act doubles the loan limit to $100,000 beginning on the date of the CARES Act enactment and ending 180 days later. So an individual may borrow $100,000 or 100% of their account balance, whichever is lesser. This is a significant increase from the $50,000 loan limit typically permitted.

Loan Repayment Extension

Participants with a current outstanding loan with a repayment due from the date of the CARES Act enactment until December 31, 2020 can suspend their loan repayments for one year. However, interest will still accrue during the suspension period, but the loan’s repayment term can also be extended by one year. Extending the repayment term allows the remaining loan payments and interest to be amortized over the extended term, which would help make keep the remaining payment amounts more manageable after the one year suspension period expires.

Retirement plans are permitted to adopt the COVID-19 related hardship and loan rules immediately, regardless of whether the plan currently includes these provisions. Plans have until January 1, 2022 to retroactively adopt an amendment to reflect the recent changes.

Required Minimum Distributions (RMDs) Are Temporarily Waived

The CARES Act waives RMDs for the calendar year 2020 for 401(k), 403(b), 457(b) plans and IRAs. This provision is especially important for retirees who would otherwise be taking RMDs in 2020. RMDs are based off of the account balance as of the end of the prior year, so December 31, 2019. With this provision, retirees are no longer required to take the RMDs and pay taxes on them at a time when their account balances may be lower now than when the distribution amount was calculated. This provision is similar to the RMD suspension applied in 2009 after the financial crisis of 2008, which worked well for many retirees.

Potential Deadline Extensions

The CARES Act amends section 518 of ERISA to allow the Labor Secretary to provide extensions for certain compliance deadlines in the event of a public health emergency. A similar provision has been enacted previously under presidentially declared natural disasters, such as hurricane and wildfires.

Have questions? Contact us. Our team of experts can walk you through the CARES Act changes that may be affecting your retirement plan.

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