COVID-19 Update: The CARES Act
Life has been coming at us fast lately as we cope with the COVID-19 pandemic. While we still have a long road to recovery in this country, a bit of relief came as Congress passed the CARES Act (Coronavirus, Aid, Relief, and Economic Security Act) and the President signed it into law last Friday. While not a silver bullet, the CARES ACT provides around two trillion dollars in aid.
The Act is multi-faceted and will have a broad reach to millions of Americans around the country. Included are the Act are seven main groups: individuals, small businesses, big corporations, hospital and public health, federal safety net, state and local governments, and education. (If you’re looking for a general overview, here’s a primer.)
The scope of this article describes how the CARES Act impacts those companies and individuals with retirement plans and current retirees. There are three main provisions impacting participants in America’s retirement plans and one important provision for current retirees covered below. As a note, to enact these provisions companies will need to work with their providers to potentially amend plan documents in order to accommodate the new provisions.
Here are the three main provisions for retirement plans:
1) Hardship distributions: Typically, if you withdraw funds from your retirement account (like a 401(k) or 403(b) or 457), you pay taxes on the money you withdraw PLUS a 10% early withdrawal penalty if you are under the age of 59 1/2.
The CARES Act temporarily waives the additional 10% tax on early withdrawals for those under 59 1/2 up to $100,000 from a retirement plan or IRA for an individual who meets one of the following criteria:
- is diagnosed with COVID-19;
- whose spouse or dependent is diagnosed with COVID-19;
- who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, 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 Treasury Secretary
Additionally, the CARES Act allows those individuals to pay the required taxes on the income from the distribution over a three-year period.
If you are trying to keep your nest egg intact, the provisions also allow individuals to repay the distributed amount tax-free back into the plan over the next three years. Those repayments would not be subject to the retirement plan contribution limits. Currently, the limit is $19,500 for those under 50, so the repayment would be in addition to this limit (or any future limits).
2) Plan Loans: Currently, retirement plans can allow participants to take loans from their balances (typically up to 50% of the vested balance).The CARES Act doubles the current retirement plan loan limits (up to 100% of the participant’s vested account balance OR $100,000).
Also, individuals who currently have a loan from their plan with repayment due from the date of enactment of the CARES Act through Dec. 31, 2020, can delay repayment for up to one year.
3) Plan Amendments: Retirement plans can adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans. The plan must be amended on or before the last day of the first plan year beginning on or after Jan. 1, 2020, or later if prescribed by the Treasury Secretary.
In addition to these three retirement plan provisions, the CARES Act also impacts current retirees by eliminating the required minimum distribution for 2020. Under normal circumstances, individuals are required to take a distribution from their retirement accounts (accounts like IRAs, 401ks) once they reach the age of 72. This required is waived for 2020.
As the coronavirus continues to wreak havoc on the world, individuals and businesses are confronting unique challenges. The CARES Act provides much-needed stimulus during these unprecedented times while the country continues to get the pandemic under control.
Please consult with your legal or accounting firms to determine how these provisions might apply to your individual business. This article is for informational purposes and general in nature.
Please don’t hesitate to reach out if there is anything we can help you or your business with during these trying times.