CARES Act Introduces Temporary Changes to Retirement Plans

by: Smith and Howard

April 9, 2020

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A growing number of people are facing economic stress because of the COVID-19 pandemic, through job loss or shortened work hours. The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was signed into law on March 27, 2020, contains several measures to help those in need. Among them are temporary changes that apply to retirement plans. The four provisions apply to 401(k), 403(b), 457 plans and IRAs, and the changes are outlined below.

Hardship Distributions

Those facing financial hardship because of the pandemic will find that the usual limitations placed on hardship distributions have been lifted. Normally, hardship distributions:

  • cannot be repaid to the plan.
  • are taxed in the year they are taken.
  • have an additional 10% early withdrawal penalty imposed on those under the age of 59 ½.
  • limit the amount that can be withdrawn according to what is deemed necessary.

According to the terms of the CARES Act, however, hardship distributions that are taken between January 1, 2020 and December 31, 2020:

  • can be repaid to the plan over 3 years from the date of withdrawal, without the usual retirement plan contribution limits (currently $19,500 for those under 50) being imposed.
  • will have the taxes on that income spread out over three years if the amount is not repaid to the plan.
  • will have the 10% early withdrawal age penalty waived.
  • will see the withdrawal limit raised to $100,000 or 100% of the vested loan balance, whichever amount is lower.

To qualify for a COVID-19 hardship distribution, plan participants will have to meet one of the following criteria:

  • be diagnosed with COVID-19;
  • have a spouse or dependent who has been diagnosed with COVID-19; or
  • experience financial hardship due to being furloughed, laid off, quarantined, unable to work due to lack of childcare, having reduced work hours or being forced to close their business or reduce hours of operation because of COVID-19.
  • any other factors that the Treasury Secretary may determine are applicable.

Plan Loans

Participants in retirement plans are normally allowed to take a loan from their balance, usually for up to 50% of the vested balance or $50,000, whichever is lower. As a result of the CARES Act, plan participants can now withdraw up to 100% of their vested balance, or up to $100,000, whichever amount is lower. This increase will be available for up to 180 days after March 27, 2020.

However, if a plan limits the number of loans that are available to a participant and that limit has already been met, participants may not be able to take out another loan, even for COVID-19 reasons, unless the sponsor of the plan decides to amend the terms of the plan.

People who had already taken a loan from their retirement plan before the pandemic and would have had to pay it off anytime between March 27, 2020 (the day the CARES Act was enacted) and December 31, 2020 will now be able to delay repaying that loan for up to 1 year from the original due date. However, interest on the deferred payments for that loan will continue to accrue.

Required Minimum Distribution

Before the COVID-19 pandemic, participants were required to take a minimum distribution (RMD) from their retirement accounts when they turned 72. However, the CARES Act waives that requirement for the calendar year 2020. This will benefit those who do not need the money as they will not have to pay the taxes that would have been due on those distributions. That also allows for maximized potential gain as the stock market recovers.

Plan Amendments

The temporary rules for retirement plans created by the CARES Act can be put into place immediately. They apply even to plans that previously did not allow participants to take out loans or hardship distributions. The CARES Act requires employers who wish to take advantage of these optional expanded rules to amend their retirement plans no later than the end of the 2020 plan year.

If you need any more information or help addressing these changes to retirement plans, please contact Smith and Howard by filling out the form below.

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