CARES Act Special Rules for Use of Retirement Funds
The Coronavirus Aid, Relief, and Economic Security Act, the CARES Act, was signed into law by President Trump on Friday, March 27, 2020. The law includes extensive financial and tax relief provisions. The CARES Act also includes a number of provisions to allow access to retirement funds in employer-sponsored retirement plans. Plan sponsors can take advantage of the changes immediately, and have until the end of the plan year beginning on January 1, 2022, to adopt any plan amendments if needed to incorporate the new provisions.
The CARES Act provides generous distribution and plan loan rules for individuals that meet any of the following criteria:
- If diagnosed with COVID-19
- If a spouse or dependent is diagnosed with COVID-19
- If they suffer financially from COVID-19 due to being quarantined, furloughed, laid off, have work hours reduced, or cannot work due to lack of child care; or due to closing or reduced hours of a business owned or operated by the individual.
- Other factors determined by the Treasury Secretary
Distributions from Retirement Plans
The CARES Act provides relief for qualified individuals related to distributions taken in 2020 from a 401(k), 403(b) or governmental 457(b) plan as follows:
- Removes the 10% penalty on early withdrawal of retirement funds, up to $100,000 for any coronavirus related distribution from a retirement plan.
- An individual who receives a coronavirus related distribution may at any time during the 3 year period beginning on the day after the date of receipt of the distribution make payments to repay the distribution to the plan from which they took the distribution or into another qualified plan. The repayment of the distribution will be treated the same as an eligible rollover distribution in a direct trustee to trustee transfer within 60 days of the distribution, which means that the distribution would not be taxable.
- In the case of any coronavirus related distribution that a participant does not pay back within the three year period noted above, any amount required to be included in gross income can be included in income over the 3 taxable year period beginning with the taxable year of the distribution.
Loans from Qualified Plans
If an employee takes a loan from a qualified employer plan during the 180 day period beginning on the date of the enactment of the CARES Act, the maximum loan amount is raised from $50,000 to $100,000. A participant can take a loan for the lesser of $100,000 or 100% of the participant’s vested account balance in the plan.
For all loans (existing or new) from a qualified plan that have re-payments that occur during the period beginning on the date of the enactment of the CARES Act and ending on December 31, 2020, the repayments can be delayed for up to 1 year. Any subsequent repayments will be adjusted to reflect the delay in the due date and any interest accruing during the delay. The one year suspension period will not count towards the 5-year maximum loan term.
Required Minimum Distribution Waiver
As expected from the Senate draft of the CARES Act, the final enacted version waives the Required Minimum Distributions (RMD) for 401(k), 403(b), governmental 457(b) plans, and individual retirement accounts. This applies to participants and beneficiaries who would have been required to take an RMD during the 2020 year. The suspension of RMDs does not count against any required distribution periods.
Defined Benefit Plan Minimum Funding Obligations Delayed
The CARES Act allows sponsors of single-employer defined benefit pension plans to delay required contributions due during 2020 until January 1, 2021.
For questions or additional information on the CARES Act, visit our COVID-19 resource page or contact your Clayton & McKervey advisor.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.