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How the CARES Act Impacts Retirement Plan Participants & Distributions

How the CARES Act Impacts Retirement Plan Participants & Distributions

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The social and economic impact of the COVID-19 pandemic continues to rage on, wreaking havoc on countless 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, provided relief and stimulus to American individuals, families and businesses.

There were a number of key provisions in the CARES Act that impacted retirement plans and made additional retirement plan savings available to individuals impacted by COVID-19. Many of those provisions are set to expire on December 31, 2020. In response to retirement plans and participants seeking more specifics about the provisions, the IRS issued Notice 2020-50.

Here is what you need to know.

Coronavirus Related Distributions

An individual who meets certain criteria may be eligible for relief under the CARES Act regarding any distribution from an eligible retirement plan made 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 or pay 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

The CARES Act allowed qualified individuals to suspend loan payments due on or after March 27, 2020 through December 31, 2020. IRS Notice 2020-50 provides employers with safe harbor procedures for re-amortizing such loans. Interest accruing during the suspension period must be added to the remaining principal of the loan, which is re-amortized over the remaining period of the loan. The loan repayments must resume after the end of the suspension period, and the due date of the loan can be extended for up to one year even if the extension takes the due date beyond five years from the original date of the loan.  

Suspension of Required Minimum Distributions

The CARES Act temporarily waived 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 December 23, 2020