Retirement Implications of the CARES Act
On March 27, 2020 the CARES Act was signed into law. The major headlines of the law are the small business loans, checks to income-qualifying individuals, and student loan payment implications. However, the headlines are omitting another major section of the CARES Act – the section that loosens access to funds in retirement plans for qualifying individuals, so that funds in retirement plans can be used to help pay for expenses during this time. Note, the loosened restrictions for access to retirement funds is for 2020 only.
Who is Eligible to Take Advantage of the Loosened Restrictions?
Before getting into the details of how the access to funds in retirement plans have been expanded, who is eligible to take advantage of this temporary change? A ‘qualifying individual’ is someone who is, or whose spouse or dependent is, diagnosed with COVID-19, or who experiences financial hardships due to furlough, quarantine, layoff, hours reduction, inability to work due to lack of childcare or business closing, or any other factors as determined by the Secretary of the Treasury as the situation changes.
Ok, so a person is eligible, how do they use take advantage of being eligible? Retirement plan administrators/sponsors are not required to verify a plan participant’s claim of eligibility – the plan administrator/sponsor can rely on the plan participant’s certification of eligibility.
What Exactly Could People Be Eligible For?
Higher Loan Limit. The loan limit for all qualified plans is now $100,000 or 100% of the participant’s vested balance, whichever is lower. This is increased from $50,000 or 50% of the participant’s vested balance. This total loan balance is to include any loans currently outstanding by a plan participant. Payments otherwise due between March 27, 2020 through December 31, 2020 will be delayed for one year, and no interest shall accrue during the delay period.
Tax-Free* and Penalty-Free Coronavirus-related Distribution. Individuals can take a Coronavirus-related distribution of up to $100,000 in 2020. The distribution will not be subject to the 10% early withdrawal fee. The distribution will be included in the recipient’s taxable income across three years, unless the recipient prefers to have it all taxed in a single year. *However, if the recipient repays the distribution or any amount thereof, within three years of receiving the distribution the amount repaid will be treated as a rollover to an eligible retirement account and will not be taxed. As a practical matter, for people repaying the distribution in a year other than the year in which it is received (2020), the person will have to amend the tax returns for that year to change the tax treatment of the distribution.
No Required Minimum Distributions in 2020. Persons with a certain 457(b), or an IRA, 403(a), or a 403(b) from which they are required to take a minimum distribution each year are not required to take such a distribution this year. The purpose of this is to help people preserve their investments and leave their funds in the retirement account if they do not need to take the distribution. There is no guidance for persons who have already taken their required minimum distributions before this law was passed, so as of now, required minimum distributions that have already been taken cannot be re-deposited or otherwise ‘undone.’
If a party to a divorce is adversely impacted by COVID-19, or is otherwise in need of funds during this crisis, these options may be worth exploring. Consult with a financial planner or tax advisor before making any important financial decisions like these!