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CARES Act Provides Relief for Some Retirement Plan Participants

CARES Act Provides Relief for Some Retirement Plan Participants

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The social and economic impact of the COVID-19 pandemic is far reaching. It is likely that the downturn will continue for several months, negatively affecting businesses and their employees. As individuals look for possible solutions to their cash flow challenges, they may turn to their retirement plans as a source of funding.

On March 27, 2020, a $2 trillion emergency spending bill was signed into law in response to the COVID-19 crisis. The Coronavirus Aid, Relief and Economic Security Act or CARES Act provides relief and stimulus to American individuals, families and businesses. Read more about how the CARES Act affects businesses and individuals here.

There are a number of key provisions in the CARES Act that impact retirement plans and make additional retirement plan savings available to individuals impacted by COVID-19. To qualify for any of the various CARES Act relief provisions, an individual must meet certain qualifications.

Coronavirus Related Distributions

An individual who meets the following criteria may be eligible for relief under the CARES Act regarding any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020.

  • Individual is diagnosed with COVID-19 or
  • Individual’s spouse or dependent is diagnosed with COVID-19 or
  • Individual experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, had hours reduced or being unable to work due to lack of child care

Under the CARES Act, these individuals may be eligible for relief, including:

  • 10% early withdrawal penalty and 20% tax withholding waived
  • Qualifying distributions of up to $100,000 across all plans and IRAs
  • Option to have income taxed over three years with taxpayer ability to recontribute within three years regardless of that year’s cap

Coronavirus Related Loans

Any loans from a qualified retirement plan made during the 180-day period beginning on March 27, 2020 will be subject to an increased limit of the lesser of $100,000 (previously $50,000) or all of the vested account balance of the participant. Any loan repayments due between March 27, 2020 and December 31, 2020 will be delayed one year.

Suspension of Required Minimum Distributions

The CARES Act temporarily waives the minimum distribution requirements for:

  • Most defined contribution plans (like 401(k) plans)
  • Section 457(b) deferred compensation plans that are maintained by an eligible employer
  • IRAs

This applies for all required minimum distributions (RMDs) that otherwise would have been required to be made in 2020. Participants who want to continue taking their distributions will be able to do so. Individuals should consider the tax effects of suspending their RMD, depending on their personal tax situation.

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COVID-19 updates

Published on April 01, 2020