CARES Act: Retirement Funding

On March 25, 2020 the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will inject roughly $2 trillion of economic stimulus into the economy designed to provide relief from the devastating toll of the COVID-19 pandemic. The final obstacles for the CARES Act are a vote by the House of Representatives, which is expected by Friday March 27, 2020, followed by the President’s signature. Passage of the CARES Act is expected.

Within the variety of different provisions that comprise the CARES Act are special rules for use of retirement funds. Included in these rules is a waiver of the 10% penalty for early withdrawals not to exceed $100,000 from 401k plans, and also a temporary waiver of the required minimum distribution (RMD) rules for 401k plans and IRAs for the calendar year 2020. Qualifying individuals will have up to three years to repay the distributions. During those three years, 401k plan contribution limits will be increased for said individuals in order to assist them in making up for such distributions. Taxpayers electing for such distributions shall include any required amounts in gross income ratably over a three year taxable period, beginning with tax year 2020. However, taxpayers can avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it.

Section 2202. Special Rules for use of Retirement Funds, defines these withdrawals as a “coronavirus-related distribution”.  These distributions must be made:

  1. on or after January 1, 2020, and before December 31, 2020,
  2. by an individual:
    • 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 (CDC)
    • whose spouse or dependent is diagnosed with such virus or disease by such test, 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.

Furthermore, the CARES Act will temporarily increase the limit on loans not treated as distributions from the lesser of $50,000 or 50% of the vested balance to the lesser of $100,000 or 100% of the vested balance. Repayments for such loans that are due between the enactment date of the Act and December 31, 2020 are eligible to be delayed for one year.

A link to Section 2202. Special Rules for use of Retirement Funds can be found Here.

These provisions will provide additional financial resources for individuals struggling during the ongoing pandemic. All employers with eligible plans should discuss these provisions with their corresponding 401k administrator to determine the overall impact and any action needed for employees that may utilize the changes implemented by the CARES Act during 2020.