On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among many other provisions, the CARES Act allows participants affected by the2020 coronavirus pandemic to have greater access to retirement funds. The new law loosens the in-service distribution restrictions that apply to many retirement plans, significantly eases the tax burden on qualified individuals who take distributions from qualified retirement plans or IRAs and expands the qualified plan loan rules.

Most of the provisions providing relief apply to “qualified individuals” consisting of persons who:

  • are diagnosed with COVID-19;
  • have a spouse or tax dependent who is diagnosed with COVID-19; or
  • experience adverse financial consequences as a result of:
  • being quarantined due to COVID-19;
  • being furloughed or laid off or having work hours reduced due to COVID-19;
  • being unable to work due to lack of child care due to COVID-19; or
  • the closing or reduction in hours of a business owned or operated by the participant
    due to COVID-19.

The plan administrator may rely on a participant’s certification that the participant satisfies the requirements to be a qualified individual. No documentation is required.

Plans do NOT have to offer the expanded COVID-19 related distribution or loan options. If you choose to offer these expanded options, the plan can start utilizing any of these provisions immediately. Please contact our office for details regarding documentation and notification to employees if you wish to offer these expanded options. (The plan must be formally amended no later than the last day of the first plan year beginning on or after January 1, 2022.)

Below are the key provisions affecting qualified retirement plans and IRAs:

Relief for Coronavirus-Related Distributions

  • In-Service Distributions Allowed:
    • The CARES Act permits a qualified individual to take a “coronavirus-related distribution” for up to $100,000 between March 27, 2020, and December 31, 2020.
    • There is no requirement that the amount of the coronavirus-related distribution be limited to the amount of the qualified individual’s actual financial needs
    • A qualified individual may take coronavirus-related distributions from multiple sources, such as both a qualified retirement plan and an IRA, but the total amount of distributions eligible for favorable tax treatment is limited to $100,000.
  • Tax Treatment of Coronavirus-Related Distributions:
    • The 10% “early distribution” penalty that generally applies to distributions from retirement plans and IRAs before age 591⁄2 is eliminated on withdrawals up to $100,000.
    • Distributions are exempt from the mandatory 20% Federal tax withholding that normally applies to distributions that are paid directly to participants.
    • Participants can avoid taxation by repaying distributions within 3 years.
    • Participants can elect to spread the inclusion of income from distributions over 3years.

Increased Loan Amounts and Delayed Repayment

  • For retirement plan loans to qualified individuals made between March 27, 2020 and September 23, 2020, the CARES Act:
    • Increases the maximum loan amount from $50,000 to $100,000.
    • Allows participants to take the full amount of their vested benefit as a loan, rather than
      limiting the loan amount to 50% of their vested balance.
  • For loan payments due between March 27, 2020 and December 31, 2020, the qualifying individual can delay the payment for up to 1 year. Interest continues to accrue during the period and the plan can extend the term of the loan for up to 1 year.

Waiver of Minimum Distribution Requirements

The CARES Act waives Required Minimum Distributions (RMD) for the calendar year 2020 for retirement plans and IRAs. This waiver also applies to those individuals who turned 70 1⁄2 (the age required to start taking RMDs prior to the effective date of the SECURE Act*) by December 31, 2019 and elected to postpone their first RMD until April 1, 2020. If an RMD has already been received during 2020, the participant may roll it over and defer paying taxes, including rolling back into the plan. Currently, the rollover is subject to a 60-day window from the date of the distribution.

* The SECURE Act (Setting Up Every Community for Retirement Enhancement Act of 2019) changed the age triggering RMDs from 701⁄2 to 72. This change did not apply to participants who attained age 701⁄2 before 2020, so the changes made in the CARES Act are only relevant to employees whose RMDs were based on age 701⁄2.

  • This provision is automatically in effect. It is not something that the plan sponsor chooses to adopt.