The Coronavirus Aid, Relief, and Economic Security Act known as the “CARES Act” passed on March 27, 2020 provides $2 trillion in financial relief to individual taxpayers and loans and other concessions to businesses.
The Act also includes several provisions affecting retirement plans which we will cover in later blog posts.
For now, we’ll focus on two important provisions that can benefit participants in 401(k)and profit sharing plans:
- The normal 10% early distribution penalty is waived on up to $100,000 in 2020 for Coronavirus-related distributions from employer retirement plans and IRAs. A three-year repayment period is available.
- Loan limits for Coronavirus-affected participants in employer retirement plans are increased to the lesser of $100,000 or 100% of the vested account balance from the lesser of $50,000 or 50% of the vested account balance. The new limits are applicable through September 27, 2020.
These provisions are optional. Calendar year plans do not have to be amended until December 31, 2022 but must be administered in “good faith”.
Here are the details.
The Act allows a “qualified individual” in a qualified retirement plan, 403(b) plan, 403(a) annuity plan, an eligible 457 plan, or an IRA to take up to $100,000 in 2020 for a Coronavirus-Related Distribution. The distribution would not be subject to the standard 10% early withdrawal penalty.
A “qualified individual” is:
- A person who has been diagnosed with the virus SARS-CoV-2 or the coronavirus disease 2019 (referred to “COVID-19”),
- His or her spouse or dependent who has been diagnosed with COVID-19, or
- Has experienced adverse financial consequences stemming from COVID-19 as a result of being quarantined, furloughed, laid off, having reduced work hours, being unable to work due to lack of childcare, the closing or reduction of hours of a business owned or operated by the individual.
The Act allows the employer to rely on the participant’s certification that he or she qualifies for the distribution. It also permits the Department of Treasury to add other factors.
The 10% early distribution penalty is waived, but ordinary income taxes are due. However, participants age 59 ½ or older would not be subject to the 10% penalty. Mandatory withholding is not required, and because they are not eligible rollover contributions, the special tax notice is not required.
The distributions may be repaid to an eligible retirement plan as a rollover contribution during the three-year period following the distribution. Unless the participant elects otherwise, the distribution will be taxed over a three-year period
Distributions may be available no earlier than January 1, 2020, but before December 31, 2020. The $100,000 limit must be aggregated among all retirement plan and cannot be rolled over.
Increase in Loan Limits and Extended Repayment Period
Loan Limits for New Loans
The Act increases the current loan limit from the lesser of $50,000 or 50% of the participant’s vested account balance to the lesser of $100,000 or 100% of the participant’s vested account balance. The new limits are effective for loans made from March 27, 2020 to September 27, 2020.
Plan loans whether new loans or existing loans that are due March 27, 2020 (the date of enactment) through December 31, 2020 may be delayed for one year. Interest will still accrue during this period, and remaining payments will be re-amortized over the extended period. The maximum five-year repayment period can also be extended for one year, or the maximum term that applies to a home loan as provided for in the plan.
As discussed above, calendar year plans do not have to be amended until December 31, 2022 but must be administered in “good faith”. We are waiting for guidance from the Internal Revenue Service for technical aspects of both provisions. We are also developing changes to administrative procedures and employee communication materials and coordinating such with 401(k) providers.
Picture Credit: Jean Chatzky