CARES Act offers economic relief to employers and individuals
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, a response to the public health crisis and associated economic fallout in the wake of COVID-19, was signed into law on March 27, 2020.
The CARES Act includes provisions applicable to retirement plans including loan distributions, withdrawals and required minimum distributions (RMDs). In addition, it also includes provisions related to health savings accounts and student loan debt. Plans sponsored by governmental employers (including public schools) should review state law for any potential modifications to conform state law to the new CARES Act provisions for governmental retirement plans.
Overview of retirement plan related provisions in the CARES Act:
- If allowed by your plan, greater access to retirement funds through a new withdrawal provision (“coronavirus-related distributions”, or CRDs) from 401(a), 401(k), 403(b), governmental 457(b) plans, and traditional IRAs, and higher loan amounts from 401(a), 401(k), 403(b) and governmental 457(b) to help ease the financial pressures faced by individuals who contract or are negatively affected by the virus.
- Waiver of required minimum distributions (RMDs) for the entire 2020 calendar year from accounts within 401(a), 401(k), 403(b) or governmental 457(b) plan, or a traditional IRA
The eligibility requirements include 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;
- Whose spouse or dependent (as defined in Code section 152) is diagnosed with such virus or disease by such a 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; or
- meeting other factors as may be issued in Treasury guidance.
Employers and service providers are entitled to rely conclusively on a participant’s self-certification to determine eligibility.
Summary of CRD, loan relief and RMD Waiver included in the CARES Act:
Coronavirus-Related Distributions (CRD): The CARES Act allows for a new type of distribution from a retirement plan or IRA called a “coronavirus-related distribution”.
- A CRD can be requested up to an aggregate amount of $100,000 (applied to all of individual's retirement plans and IRAs) through December 30, 2020.
- Any applicable IRS 10% early withdrawal penalty tax and federal 20% mandatory withholding that otherwise apply to distributions will not apply to CRDs.
- The CRD will be reported as a distribution for tax year 2020, but the individual may include the amount in gross income ratably over three years – unless the individual elects to claim the income all in one year.
- The distribution must come from 401(a), 401(k), 403(b), governmental 457(b) plan) or a traditional IRA.
An individual who satisfies the eligibility requirements for a coronavirus-related distribution:
- may take a loan from a 401(a), 401(k), 403(b), or governmental 457(b) plan beginning on March 27, 2020 through September 22, 2020 of up to the lesser of $100,000 (taking into account the outstanding balance of all other loans taken from plans of the employer) or 100% of the nonforfeitable value of the account (note existing outstanding loan amounts and number of loans permitted under the plan will serve to
decrease the amount available); and
- may delay repayment of a new or existing loan from a 401(a), 401(k), 403(b), or governmental 457(b) plan for up to one year beginning March 27, 2020 through December 31, 2020. (the “suspension period”). Please note that interest will continue to accrue during the suspension period. The loan will be re-amortized over the remaining term of the loan plus the length of the suspension period in January 2021 and will include the outstanding principal balance plus the interest accrued during the suspension period.
Please note that a plan document, may have a provision concerning the number of outstanding loans permissible. Additionally, the plan document must offer loans in order to implement this provision
RMD Waiver for the 2020 Calendar Year:
- RMDs are waived for all participants and beneficiaries in 2020 from 401(a), 401(k), 403b), governmental 457(b) plans and from traditional IRA's.
Quote from Charlie Nelson,
“With lost wages, significant health care costs and other unexpected expenses, we recognize that individuals may have no choice but to tap their retirement savings to address the financial challenges that they are facing today” said Charlie Nelson, CEO of Retirement and Employee Benefits at Voya Financial.
“Before acting on any of the provisions within the CARES Act, we strongly encourage employers and individuals to give careful thought to if they need to take advantage of these provisions, how to best do so, and at what levels. For example, individuals should consider emergency savings and short-term investments, as well as flexible and health savings accounts for addressing medical expenses. If someone does need to take advantage of the new coronavirus-related distribution options, it’s important to look at the tax implications of withdrawing from a qualified account and consider whether a loan or distribution would best meet their needs.”
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