The Coronavirus, Aid, Relief and Economic Security (CARES) Act was signed by President Trump on March 27. The bill represents a historic $2 trillion stimulus package for American workers, businesses and industries. It includes a few provisions in Sections 2202 and 2203 that affect retirement plans for qualified individuals, defined as someone who:
- Has been diagnosed with COVID-19;
- Has a spouse or dependent diagnosed with COVID-19; or
- Experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Secretary of the Treasury.
The Act permits a qualified individual to withdraw up to $100,000 from their retirement plan on or after January 1, 2020 and before December 31, 2020. While the distribution under the Act is taxable income, the distributed amount would not incur the 10% early withdrawal penalty ordinarily applicable to someone under age 59-1/2. In addition, the individual making the distribution can elect to spread the taxable income ratably over a 3-year period as required to be included in gross income. This is not an eligible rollover distribution; however, CARES also allows the individual to repay some or all of the withdrawal at any time during a 3-year period from the date on which the distribution was received.
For retirement plans that allow participant loans, the Act doubles the amount available for a loan, increasing the limit to the lesser of $100,000 or 100% of the participant’s vested account balance for a qualified individual. Qualified individuals with an outstanding loan in the plan with a repayment from the date of the enactment of the Act through December 31, 2020 can delay the repayment for one year and disregard the 5-year maximum repayment limit if applicable.
Retirement plans are now allowed to operate in accordance with these provisions prior to the required plan amendment, even if hardship distribution or loans are not currently allowed. Plan documents must be formally amended by the end of the plan year beginning on or after January 1, 2022 or such a later date as the Secretary of the Treasury may prescribe.
Required Minimum Distributions
The SECURE Act recently increased the age in which an individual is required to begin distributions (RMDs) from a retirement plan or IRA to age 72. The CARES Act waives RMDs for calendar year 2020 for retirement plans and IRAs.
While the CARES Act does provide flexibility for those impacted, it is important to remember as plan sponsors that qualified plan assets are retirement savings. It is important to discuss them with one of our Retirement Plan Solutions team members.