CARES Act: Retirement Plan Relief Provisions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act
was signed into law on March 27, 2020. This $2 trillion emergency relief
package represents a bipartisan effort to assist both individuals and
businesses in the ongoing coronavirus pandemic and accompanying economic
crisis. The CARES Act provisions for retirement plan relief for individuals
under federal tax law are discussed here.
For those seeking access to their retirement funds, these
include special provisions for coronavirus-related distributions and loans.
For those seeking to preserve their retirement funds, certain required
minimum distributions from retirement funds have been suspended.
Coronavirus-related
distributions
A 10% penalty tax generally applies to distributions from an
employer retirement plan or individual retirement account (IRA) before age
59½ unless an exception applies. Due to the coronavirus pandemic, the
penalty tax will not apply to up to $100,000 of coronavirus-related
distributions to an individual during 2020. Additionally, income resulting
from a coronavirus-related distribution is spread over a three-year period
for tax purposes unless an individual elects otherwise. Coronavirus-related
distributions can also be paid back to an eligible retirement plan within
three years of the day after the distribution was received.
What does
"coronavirus related" mean?
For purposes of the distribution and loan rules described
here, "coronavirus related" applies to individuals diagnosed with
the illness or who have a spouse or dependent diagnosed with the illness,
as well as individuals who experience adverse financial consequences as a
result of the pandemic. Adverse financial consequences could include
quarantines, furloughs, and business closings.
Loans from
qualified plans
Qualified plans such as a 401(k) can allow an employee to take
out a loan. These loans can generally be repaid over a period of up to five
years. They're also generally limited to the lesser of $50,000 or 50% of
the total benefit the employee has a right to receive under the plan.
However, for a coronavirus-related loan made between March 27, 2020, and
September 22, 2020, the loan limit is increased to $100,000 or 100% of the
amount the employee can rightfully receive under the plan (whichever amount
is less). In the case of a loan outstanding after March 26, 2020, the due
date for any repayment that would normally be due between March 27, 2020,
and December 31, 2020, may be delayed by coronavirus-related qualifying
individuals for one year, and the delay period is disregarded in
determining the five-year period and the term of the loan.
Most required
minimum distributions (RMDs) suspended for 2020
RMDs are generally required to start from an employer
retirement plan or IRA by April 1 of the year after the plan participant or
IRA owner reaches age 70½ (age 72 for those who reach age 70½ after 2019).
If an employee continues working after age 70½ (age 72 for those who reach
age 70½ after 2019), RMDs from an employer retirement plan maintained by
the current employer can be deferred until April 1 of the year after
retirement. (RMDs are not required from a Roth IRA during the lifetime of
the IRA owner.) RMDs are also generally required to beneficiaries after the
death of the plan participant or IRA owner. A 50% penalty applies to an RMD
that is not made.
The CARES Act suspends RMDs from IRAs and defined contribution
plans (other than Section 457 plans for nongovernmental tax-exempt
organizations) for 2020. This waiver includes any RMDs for 2019 with an
April 1, 2020, required beginning date that were not taken in 2019. This
one-year suspension does not generally affect how post-2020 RMDs are
determined.