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 The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

Retirement Plan Provisions Summary – April 1, 2020

The Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law on March 27, 2020.    Below is a brief description of key provisions relating to qualified retirement accounts.  These provisions, unless otherwise noted, are effective immediately.

COVID-19 Penalty-Free Distributions in 2020

Under the CARES Act, a plan may optionally choose to allow eligible participants (under age 59.5) to take penalty-free distributions at any time during calendar year 2020 from their qualified defined contribution retirement plan accounts.  Listed below are the following circumstances with allow participants to take a “COVID-19 related distribution”.

1.  The plan participant is diagnosed with COVID-19 by a CDC-approved test; or

2.  The spouse or dependent of the plan participant is diagnosed with COVID-19 by a CDC-approved test; or

3.  The plan participant “experiences adverse financial consequences” as a result of being quarantined, being furloughed, or being laid off, or having work hours reduced due to COVID-19; or

4.  The plan participant is unable to work due to COVID-19 childcare issues; or 

5.  The plan participant has closed or reduced hours in a business owned and operated by the plan participant; or

6.  The plan participant has experienced other factors as determined by the Secretary of the Treasury.

The plan administrator may rely upon the participant’s certification that they qualify under one or more of these factors.

If a participants qualifies and elects to take an early, COVID-19 distribution, the the amount of the distribution (full or partial) can be re-contributed to the retirement plan or any other qualified retirement plan within three years from the date of the distribution.  Future plan contributions are not affected by any re-contributions made.

Additionally, if a participant elects to take an early distribution before 12/31/2020, taxation on the distribution can be spread over a three-year period. 

The following conditions apply to any COVID-19 related distributions:

1.  Limited to $100,000 per tax year, aggregated across all plans and IRAs in which the individual may participate.

2.  Plan distributions are not subject to 20% mandatory tax withholding upon distribution.

3.  Exempt from 10% early withdrawal penalty generally applicable to distributions made to participants who are 59.5 or younger.

4.  Eligible to be indirectly rolled into an IRA or employer plan within 3 years from the date the distribution is taken.

5.  Amounts not indirectly rolled into an IRA or employer plan are included in gross taxable income on a pro-rata basis over 3 tax years (beginning with the tax year of the distribution), unless the participant elects to include all amounts in a single tax year. 

Coronavirus-Related Loan Relief

There are two provisions related to loan relief:

1. Plans may allow eligible participants, as defined above regarding distributions, to take loans up to the lesser of $100,000 or 100% of the participant’s vested account balance.
2. Upon the request of an eligible participant, plan sponsors must suspend loan repayments due on outstanding loans that are in good order for a period of up to 12 months. This relief expires on December 31, 2020. The suspension period is to be added to the original loan term when repayments, including accrued interest, resume, regardless of the length of the loan’s original term.

Participants who are furloughed or laid off but who continue to be considered active employees may also suspend loan repayments for up to one year of unpaid leave. 

Waiver of 2020 Required Minimum Distributions (RMDs)

1. RMDs are not required for 2020 from IRAs and qualified retirement plans.
2. Individuals who turned age 70½ prior to 2019 will not be required to receive an ongoing RMD for 2020.
3. Individuals who turned age 70½ in 2019 and who did not receive their first RMD for 2019 on or before January 1, 2020 will not have to receive their first (2019) RMD or their 2020 RMD.
4. Beneficiaries receiving life expectancy payments will not be required to receive their 2020 beneficiary RMD.
5. Beneficiaries who have an account balance in the plan subject to the five-year distribution rule may extend their required distribution by one year (full distribution of the account must be made by the 6th anniversary of the participant’s death).

If an RMD has already been made in 2020 that would have qualified for the waiver, and it is still within the 60-day time period from the date of the RMD, that payment can be rolled back into a qualified plan or IRA to avoid taxation in 2020

Hardship Distributions 

The CARES Act does not change hardship distribution rules.  However, previously issued regulations provide participants have a safe harbor hardship if they live or work in FEMA declared disaster qualifying for individual assistance.  As of this writing there are 18 states that meet this disaster declaration. 

Putting this into effect

Plan Sponsors can elect to do nothing, but if any of these provisions are desired the plan amendment itself need not be made until the last day of the plan year beginning on or after January 1, 2022. Thus, for a calendar year plan, the amendment to the plan documents must be made by no later than December 31, 2022. Governmental plans have an additional two years; again, for a calendar year plan that would be December 31, 2024

Source:  Tony Michael, President of Future Benefits of America, April 1, 2020

Sources:  IRS, “COLA Increases for Dollar Limitations on Benefits and Contributions,” November 18, 2019; IRS, “SEP Plans FAQs – Contributions,” May 13, 2019; IRS Notice 2019-59 “2020 Limitations Adjusted as Provided in Section 145 (d), etc.,” 2019.

Source:  IRS, Rev Proc 2019-44, 2019 

Source:  IRS, Rev Proc 2019-44, 2019 

Sources:  IRS, Rev Proc 2019-44, 2019; Tax Foundation, “2020 Tax Brackets,” November 14, 2019; IRS, “Questions and Answers on Net Investment Income Tax,” July 22, 2019.

Sources:  IRS, Rev Proc 2019-44, 2019; Tax Foundation, “2020 Tax Brackets,” November 14, 2019; IRS, “Questions and Answers on Net Investment Income Tax,” July 22, 2019.

Sources:  IRS, Rev Proc 2019-44, 2019; Tax Foundation, “2020 Tax Brackets,” November 14, 2019; IRS, “Questions and Answers on Net Investment Income Tax,” July 22, 2019.

*Sources: IRS, “What’s New – Estate and Gift Tax,” December 19, 2019; IRS, Rev Proc 2019-44, 2019; Social Security Administration, “Benefits Planner: Income Taxes and Your Social Security Benefit,” 2019; Social Security Administration, “Fact Sheet, Social Security, 2020 Social Security Changes,” 2019.*

*Sources: IRS, “What’s New – Estate and Gift Tax,” December 19, 2019; IRS, Rev Proc 2019-44, 2019; Social Security Administration, “Benefits Planner: Income Taxes and Your Social Security Benefit,” 2019; Social Security Administration, “Fact Sheet, Social Security, 2020 Social Security Changes,” 2019.*

*Sources: IRS, “What’s New – Estate and Gift Tax,” December 19, 2019; IRS, Rev Proc 2019-44, 2019; Social Security Administration, “Benefits Planner: Income Taxes and Your Social Security Benefit,” 2019; Social Security Administration, “Fact Sheet, Social Security, 2020 Social Security Changes,” 2019.*