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The CARES Act: Retirement Plan Impacts

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CARES Act will expand access to Retirement Savings

Retirement plans have many facets; yet, all have one singular focus – to provide a vehicle for an individual to take control over his or her retirement through pre-tax funding now.

Now that the CARES Act has been signed into law you need to know what options plan participants will have going forward if allowed by your individual plan. Plan Sponsors must opt-in for these provisions, they are not automatically adopted without sponsor action.

Retirement Plan “Distributable” Events

By law, there are only 4 events that would permit a plan participant from accessing his or her qualified retirement plan account (unless the plan has been designed less restrictively):

  1. Death
  2. Disability
  3. Termination, and
  4. Retirement

Many retirement plans offer loans. Many more offer in-service and hardship distributions, too. However, generally, if a participant takes money out of a qualified retirement plan before age 59 1/2 (in-service withdrawal or termination withdrawal taken in cash, for instance; not talking about loans yet), that participant will pay income tax on the distrbution AND a 10% penalty, which is generally imposed by Section 72(t)  of the Internal Revenue Code of 1986.

Section 72(t) shall not apply to any coronavirus-related distribution

The CARES Act would allow a plan participant to take a “coronavirus-related distribution” of up to $100,000 in the year 2020 without penalty (i.e. no 10% excise tax) across ALL retirement accounts.

The withdrawal may be repaid within a 3-year period starting on the day after the date on which the distribution was made. Interest is not included in the repayment amount as it generally is for plan loans.

So, what is a coronavirus-related distribution?

A “coronavirus-related distribution” is a distribution made to an individual during 2020:

  • Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
  • Whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with one of the two diseases, or
  • Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).

While the distribution is free of the 10% slap on the wrist, it does not evade income tax. Normally, the mandatory 20% withholding is done at the time of distribution. Now, the CARES Act allows the participant to spread the income ratably over a 3-year period starting with 2020 if they choose the option.

Increased Limit on Loans

Loans are generally limited by the lesser of 50% of the participants vested account balance or $50,000. Now, during the 180 day period after the enactment of the CARES Act, the maximum amount an individual may borrow from his or her retirement plan is $100,000.

But, what about that pesky 50% part of the rule?

Well, they removed it.

…shall be applied by substituting “the present value of the nonforfeitable accrued benefit of the employee under the plan” (aka 100% of the vested balance) for “one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan” (aka, 50% of your vested balance) .

Loans are repaid with after-tax money, think twice before taking a loan. Then again, desperate times call for desperate measures. You should consider speaking with a tax adviser or your retirement plan investment professional before initiating a distribution.

One-Year Loan Delay

The CARES Act provides that the deadlines of Code Section 72(p) may be automatically delayed for one year for eligible loans.

Eligible loan are loans to participants who have suffered financially as a result of the COVID-19 pandemic.

Section 2202 of the CARES Act provides that loan repayments due during the period from March 27, 2020, to December 31, 2020, shall be automatically extended one year for any borrower who, in connection with the COVID-19 pandemic:

  • has been laid off;
  • has been furloughed;
  • has had his or her normal working hours reduced;
  • is unable to work due to an unavailability of child care;
  • owns or operates a business that has been closed or experienced reduced hours; or
  • informs the Plan Administrator that he or she (or his or her spouse or dependent) has been diagnosed with COVID-19 by a CDC-approved test.

Once loan repayments resume, they will be adjusted to reflect the delay period AND the associated interest that had accrued during the delay. The ultimate due date of such a loan shall be extended one year.

RMDs On Hold

This is not optional at the plan level. All RMDs for 2020 are waived. For those required to withdraw an RMD (required minimum distribution), the CARES Act will temporarily waive the requirement for the 2020 year. First year RMDs for 2019, which must be taken by April 1, 2020, have also been put on hold.

Generally, an account holder must take their first RMD by April 1 of the year he or she turns 70½ – which has been increased to age 72 thanks to the SECURE Act. Then, the account holder must take an RMD by the end of each year or pay a penalty of 50% of the RMD amount. Even though the SECURE Act raised the age to 72, it does not apply to those account holders who turned age 70½ on or before 12/31/2019.

RMD amounts are based off the prior year end account balance. If account holders can defer them, many Americans could avoid withdrawals at a time when the market hit remarkable lows.

Guidance

It is important to note that while the Act has been signed into law, the IRS and DOL must provide guidance on the application of the Act when and if enacted. We will provide you up to date content as releases occur.

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