On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act includes several provisions impacting retirement plans.
The CARES ACT waives the 10% early withdrawal penalty tax on “Coronavirus Related Distributions” from a retirement plan or IRA. A “Coronavirus Related Distribution” is a distribution taken prior to December 31, 2020, for an individual who:
- Is diagnosed with COVID-19;
- Whose spouse or dependent is diagnosed with COVID-19;
- 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
- Other factors determined by the Treasury Secretary
The administrator of the plan can rely on an employee’s certification that the employee satisfies one of the conditions for a coronavirus Related Distribution.
The maximum amount an individual can withdrawal as a Coronavirus Related Distribution is $100,000. In addition to avoiding the penalty, under the law individuals can pay the income tax on the amount of the withdrawal ratably over a 3-year period. In addition, the law permits individuals to repay the amount distributed tax-free back to the plan. Any repayment will not be subject to the retirement plan contribution limits. When a participant repays the hardship distribution, they will need to file an amended tax return.
We recommend that any withdrawals should be discussed with a participant’s accountant and financial advisor prior to taking such withdrawals.
The CARES Act enhanced the regular plan loan provisions for a loan taken by an individual that meets the requirements for a “Coronavirus Related Distribution”. Under the CARES Act, a participant who meets the requirements can take up to the lesser of 100% of their vested balance, up to $100,000, for loans taken within 180 days of March 27, 2020.
The Act also provides that for “qualified individuals” any repayment that would otherwise be owed on a plan loan through the end of 2020 may be delayed for up to one year.
Minimum Required Distributions
The CARES Act waives the required minimum distributions (RMD) from retirement plans and IRAs for 2020. This applies to the RMD for 2020 but also to the RMD that is required to be taken before April 1, 2020, for individuals who turned 70½ in 2019.
The withdrawal provision is helpful to participants who need access to money because of the impact of the Coronavirus. The waiver of the 10% penalty tax and allowing the regular income tax to be paid over three years, are both very beneficial provisions for participants. However, here are consequences participants should consider:
- Perhaps most important, the longer-term impact that taking money out of the retirement plan will have on retirement savings;
- The impact of taking a withdrawal after a steep market decline. The participant may be selling when the fund values are low and thereby locking in losses;
- Whether paying all the tax in the current year is more advantageous than spreading the tax over three years;
- Other sources of liquidity to consider using first
Participants contemplating taking a loan should also consider the impact the loan will have on their retirement savings and the potential loss of future positive returns should the market recover from the significant market decline we have recently experienced.
Plan recordkeepers are in the process of setting up procedures for implementing this provision. Under the CARES Act, plans can implement the changes immediately and have until the last day of the first plan year beginning on or after January 1, 2022, to make the required amendment.
Contact your recordkeeper or plan advisor for details.
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