The CARES Act (CORONA VIRUS Aid, Relief, and Economic Security Act of 2020), allows much economic relief for Americans, including retirement plans and accounts. These changes provided under the CARES Act provide less strict guidelines to retirement plans, given this unprecedented pandemic, including but not limited to taking withdrawals, and/or loans, from their retirement accounts, as well as changes to the required minimum distributions from retirement accounts.

Some options available to Americans during this pandemic regarding retirement accounts are as follows: Required minimum distributions (RMDs). Historically, the required owners of retirement accounts including IRAs, 401(k)s and the like, to start taking withdrawals by April 1 of the year after they turn 70 and ½. However, the SECURE Act of December 2019, changed this requirement to allow these withdrawals for those individuals whose birthdays are after July 1, 2019, or later, to begin by April 1 of the year after they turn 72. The amount of the Required Minimum Distribution (RMD) for any year is the account balance as of the end of the preceding calendar year, divided by a distribution period derived from the IRS rules. However, the RMD’s do not apply to ROTH IRAs. Now, with the new provisions set forth in the CARES Act, allows account owners to skip both their 2019 RMD (if it was their first year and they had not yet made an RMD by April 1, 2020), as well as their 2020 RMD. Unfortunately, there is no provision allowing those who already took their RMD prior to the new CARES Act, to recoup their distribution.

In short, this new provision allows those individuals who do not want to withdraw monies from their retirement accounts as previously required and keep their money in the retirement account(s), thereby saving Americans from having to pay the mandatory taxes associated with the withdrawal.

Early distributions from retirement plans.

Prior to the CARES Act, Americans were forced to pay a 10% penalty to any early distribution from IRAs and qualified defined contributions retirement plans, if the participant was younger than 59 and ½. Now, the CARES Act waives such 10% penalty for individuals (employees, their spouses, and their dependents) who meet one of the following factors: 1) have been diagnosed with COVID-19; 2) who have experienced adverse financial consequences as a result of being quarantined, furloughed, or laid off; or 3) who have otherwise lost income (including because of having to be home to provide child care). This 10% penalty waiver is for distributions up to $100,000.00 or the retirement account’s balance. The withdrawal can be from an IRA, in addition to a defined contribution plan, such as a 401k, etc.

The amounts of the COVID-19 withdrawals can be repaid to the employee’s qualified plan or retirement plan and can be repaid with three years and the amounts repaid will not be subject to tax. However, if the amounts are not paid back, then the individual is still subject to the normal taxation of the withdrawal. This new provision simply allows an early distribution without the normal 10% penalty for early withdrawal.

Retirement Plan Loans

Before the CARES Act, IRA Rules permit, but do not require, plan sponsors to include loan provisions in their qualified employee benefit plans. This does not include IRAs, including SEP and Simple IRAS, as these retirement plans do not offer loans.

If a plan does allow for loans, the maximum amount of the loan is: the greater of $10,000.00 or 50% of the vested account balance; or, $50,000.00, whichever is less. While most plans have their own specific terms for borrowing and repayment, the IRS rules require that, except for loans taken for the purpose of purchasing the employee’s principal residence, loans must be repaid with five years. Now, the CARES Act offers several provisions that may be advantageous for those individuals who may want to take a loan from their employer-sponsored retirement plans. First, the maximum amount borrowed increased from $50,000.00 to $100,000.00 and the percentage test limit also increased, from half of the present value of the participant’s account balance to the entire value at the time of the loan. This provision is in effect beginning on March 27, 2020 through 180 days thereafter. Secondly, if the participant has an existing loan and loan repayment is due between the date of the CARES Act’s enactment and the end of the year, the Act further allows the repayment to be delayed for one year from the original due date, with subsequent loan repayments adjusted to reflect the delay in the 2020 repayment. Again, this new provision is subject to the employee’s specified employer plan rules.

Please check with your Plan Administrator for your specific employer plan rules to ensure that your plan allows for loans. Employer contributions. The Act further allows for employer contributions to their employer-provided retirement plans (such as 401ks) to be delayed until 2021. This is definitely something that must be investigated further if you are in the process of a divorce where the plan will be divided by way of a Qualified Domestic Relations Order (QDRO). If those contributions are delayed, but a QDRO is processed, those delayed contributions may not be divided, despite it being “marital property”. Perhaps including a provision in the QDRO to provide for a second or subsequent QDRO, once the contributions are made by the employer, could solve this issue.

You should check with your legal representative to ensure that provisions are being added to account for these new changes in the Act.

Written by Jackie Sulich

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