The primary purpose of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is to provide financial relief to Americans suffering from the financial fallout of the COVID-19 pandemic.
Among the many provisions in the CARES Act are several temporary changes that relax IRS rules for retirement account withdrawals and loans for qualified individuals impacted by COVID-19.
Restrictions on Eligibility for CARES Act Retirement Plan Withdrawals
The CARES Act provides for early access to retirement funds and relaxed rules for penalties and taxes on withdrawals, but only to retirement account holders who meet the following eligibility requirements:
- You have been diagnosed with COVID-19;
- You have a spouse or dependent diagnosed with COVID-19;
- You have been laid off, furloughed, suffered a reduction in work hours, are unable to work, or lack childcare due to COVID-19;
- You have had a job offer rescinded or a delayed start for a new job due to COVID-19;
- You have experienced adverse financial circumstances because you or your spouse’s finances have been affected by COVID-19; or
- You or your spouse is a business owner whose business has been closed or is operating under reduced hours due to COVID-19
Relaxation of Early Distribution Rules
The CARES Act allows for withdrawals of up to $100,000 from defined contribution retirement plans with the following tax benefits:
- 10% tax penalty is waived, although withdrawals are still taxed as ordinary income;
- Withdrawals will not be subject to mandatory 20% withholding from an early distribution;
- Total withdrawal amount can be spread over three years for tax purposes; and
- Participants have up to three years to return funds, which can be paid back to any eligible retirement plan with no tax consequence.
Enhanced Loan Rules
Retirement plan loans from certain accounts — 401(k)s, 403(b)s, and 457 plans — are typically capped at $50,000 or 50% of the participant’s vested balance, whichever is less. Under the CARES Act, retirement plan participants may now borrow up to $100,000 or 100% of their vested balance, whichever is less. This applies only to loans taken out from March 27, 2020, to September 23, 2020.
These loans must be repaid within five years, although borrowers are allowed to skip making any payments in 2020 and begin their repayment schedule in 2021. However, interest on the loan will still accrue in 2020.
The rules have also changed on loan repayment if you lose or change your job in 2020. Under the Tax Cuts and Jobs Act of 2018, the repayment deadline was extended from 60 days of losing or changing a job to the day your federal tax return is due for that calendar year, with extensions. So, if you lost your job or changed employers in 2020 after taking out a retirement plan loan, you will have until October 15, 2021, to repay the loan, or it will be treated as a taxable distribution.
RMDs Suspended for 2020
The CARES Act suspends required minimum distributions (RMDs) from tax-deferred retirement accounts for 2020. Individuals that have already taken a 2020 RMD are allowed to treat that distribution as an eligible rollover distribution and return it to their account if the distribution was made within the past 60 days. Beneficiaries of an inherited retirement plan are not eligible for a RMD rollover unless they are the surviving spouse of a deceased plan owner.
Plan Amendments
Per IRS Notice 2020-50 released on June 19, 2020, employers can choose whether to implement these COVID-19-related distribution and loan rules and amend their plans accordingly. Qualified individuals can claim the tax benefits of COVID-19-related distribution rules even if plan provisions aren’t changed.
The IRS guidance also provides employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes that there may be other reasonable ways to administer these rules.
Hall Benefits Law helps the organizations we serve set up the benefits plans that are right for their members, puts processes in place to ensure regulatory compliance, and keeps benefit plans updated based on changes in laws and regulations. To learn more about the services we offer, call 678-439-6236 today.
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