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Impact of Coronavirus Aid, Relief and Economic Security Act (CARES Act) on Retirement Plans

Retirement Funding

The CARES Act, signed into law on March 27, 2020, is a stimulus bill. The CARES Act provides three substantial changes to retirement plans that may impact our clients.

We have summarized important changes below:

  1. Plan loan availability and guidelines
  2. Existing plan loan relief
  3. No Required IRA Distributions in 2020

Coronavirus-Related Retirement Distributions

(Company 401(k) Plan Withdrawals)

This relief allows qualified retirement plans to permit in-service distributions from a participant’s vested account balance. These are not usually permitted under normal withdrawal restrictions. This relief will be offered through December 31, 2020. Requirements include:

  1. Maximum limit of $100,000, aggregated across all plans of the employer;
  2. Not subject to the mandatory 20% federal tax withholding;
  3. Exempt from 10% early withdrawal penalty, generally applicable to distributions made to participants who are age 59-1/2 or younger;
  4. Eligible to be indirectly rolled into an IRA or employer plan within 3 years from the date the distribution is taken; and
  5. Any amounts not indirectly rolled into an IRA or employer plan are included in gross taxable income, pro-rata, over the 3 tax years beginning with the tax year of the distribution, unless the participant elects to include all amounts in a single tax year

Eligibility for the CARES Retirement Distributions

To qualify you must be one of the following:

  • An individual diagnosed with COVID-19 or SARS-CoV-2 illness.
  • An individual whose spouse or dependent is diagnosed with COVID-19 or SARS-CoV-2.
  • An individual who experiences “adverse financial consequences” as a result of being quarantined, furloughed, laid off, reduction of work hours, inability to work due to lack of child care caused by COVID-19 or SARS-CoV-2, the closing or reduction of hours by a business owned or operated by such participant due to COVID-19 or SARS-CoV-2...or other factors determined by the Treasury Secretary (which means further guidance could be coming).

The plan sponsor can approve a distribution when the impacted participant certifies that he/she meets these parameters.

The maximum loan limit has doubled. A participant who meets the parameters defined above may now take a loan up to $100,000 or 100% of the vested account balance, whichever is lesser. This will be enacted until September 23, 2020. However, if a loan provision does not already exist in the participant’s plan, the plan will need to be amended.

Retirement Plan Loan Repayment Relief

Upon request, impacted participants with outstanding loan balances on or after March 27, 2020 may be allowed to delay repayments for up to one year. This will only apply to repayments due between March 27, 2020 and December 31, 2020. The term of the loan will be extended and interest that is accrued will be added to future payments.

Required Minimum Distributions

Under the CARES Act, the required minimum distributions requirements are waived. This will extend through the remainder of the year. This applies to participants with a required distribution date in 2020, as well as a required beginning date in 2020. Meaning, it also applies to the first RMD due by April 1, 2020 for those who turned 70-1/2 in 2019

Understanding the Impact of the CARES Act on Retirement Plans

We understand that this is a stressful time for everyone. The uncertainty can be scary. However, we are here to help. If you have questions about the changes, please contact us.