On Friday, March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES), which President Trump signed into law. This act will provide significant relief to both individuals and businesses as they manage the current health crisis and its economic effects. The law will impact retirement plans and IRAs in the following ways:
Individuals are now permitted to withdraw up to $100,000 in aggregate from qualified retirement plans and IRAs from January 1 – December 31, 2020 for Coronavirus-related distributions*. The 10% early withdrawal penalty for distributions prior to age 59 ½ is waived and any regular income taxes due are permitted to be spread over a three-year period unless otherwise elected. Thus, there is no requirement to withhold federal income taxes. Repayment of these distributions is permitted within three years to the retirement plan or another IRA, and its repayment is not subject to annual retirement plan contribution limits. Repayments will be treated as rollover contributions.
* Coronavirus-related distributions include:
- A person diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention.
- A spouse or dependent who has been diagnosed.
- Adverse financial consequences, including being furloughed, quarantined, laid off, reduction in paid work hours, reduction of a business, or unable to work due to lack of childcare as a result of the Coronavirus. This last classification is enormously broad and will apply to many individuals.
Plan sponsors can rely on employee’s certification that these conditions are satisfied, which alleviates much of the administrative review and liability that is typically required with hardship distributions. Cumulatively, these changes will enable greater access for individuals seeking to use assets from their retirement accounts to recover from the current crisis.
REQUIRED MINIMIUM DISTRIBUTION (RMD) CHANGES
Each year, minimum distributions are required from qualified retirement plans and IRAs upon reaching age 70 ½ (prior to 2020) or age 72 (2020 and later). This act temporarily waives all RMDs during calendar year 2020 to alleviate the concern that individuals would be forced to “sell low” by taking distributions after substantial market declines.
RETIREMENT PLAN LOAN CHANGES
The loan limit for qualified retirement plans has been temporarily increased to the lesser of $100,000 or 100% of the participant’s vested account balance for loans taken within 180 days of the enactment. The limit was previously the lesser of $50,000 or 50% of the participant’s vested account balance. Additionally, a one-year delay is permitted for loan repayments due in 2020 (with subsequent payments adjusted for the delay and the ability to disregard the five-year maximum loan limit). This will allow participants who may have been financially challenged by the Coronavirus additional flexibility to borrow from their retirement plan to meet their immediate needs.
These expansions are optional and may be utilized by Plan Sponsors immediately. However, if adopted, plan amendments are required by the last day of the plan year beginning on or after Jan. 1, 2022. If you have any questions about how this new legislation may impact you or your company, please reach out to your Relationship Manager.