The CARES Act, Your Retirement Plan, and You
As of 5/26/2020
Previously we discussed how the recent stimulus package, “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act) helped small businesses owners struggling during the ongoing COVID-19 crisis.
Today, we’ll take answer some of our most frequently asked questions when it comes to CARES and your retirement plan.
Who is qualified for Retirement Plan relief?
The most significant retirement plan changes in the CARES Act are intended to help retirement plan participants effected in some way by COVID-19. The CARES Act introduces coronavirus-related distributions and expands participant loans for qualified individuals.
A qualified individual is someone who:
- has been diagnosed with COVID-19;
- has a spouse or dependent(s) diagnosed with COVID-19; or
- experiences adverse financial consequences due to the virus resulting from:
- being quarantined, furloughed, or laid off
- having their work hours reduced
- being unable to work due to lack of child care; or
- closing or reducing hours of a business the individual owns or operates.
What are the rules around withdrawing money from my retirement plan?
The CARES Act permits distributions from January 1, 2020 to December 30, 2020 to qualified individuals> (see above) of up to$100,000. In addition, the10% early withdrawal penalty for such distributions is waived and the20% federal income tax withholding can be ignored. The distribution can berepaid to the plan within 3 years to gain tax-free rollover treatment. Taxable amounts required to be included in gross income can be spread over a 3-year period.
Is there an age requirement to take the CARES Act Distribution?
No. As long if you are considered a qualified individual, you may take advantage of CARES Act relief, regardless of age.
How do I pay back a CARES Act distribution?
Repayments of CARES Act distributions will be treated as related rollover contributions to the plan. They will not apply against any annual contribution limits. The process to “repay” the distribution is the same as the process to rollover funds into the plan.
If you lose your job during this time, you can still pay back your CARES Act distribution back to a plan or IRA, into which they you are eligible to make rollover contributions.
COVID-19 401(k) Loans
Can I still borrow from my 401(k) or other workplace retirement plan?
Yes–and you can take longer to pay them off. If you’re a qualifying individual, repayments are extended by one year for loan payments due March 27, 2020 through December 31, 2020. This means, that while you can stillchoose> to pay your loan on time, you> will not be penalized if you’re up to one year late for each payment due during this period.Keep in mind that even though you don’t have to make payments during this time, interest will continue to accrue.
Depending on your plan and 401(k) provider, The CARES Act also gives an opportunity for savers to borrow more money than usual. An optional provision allows qualified savers to March 27, 2020- September 22 2020, to borrow:
(a) 100% of their vested account balance
Whichever is less. This temporarily increases the usual 401(k) loan limit, which is typically half your balance. Learn more about 401(k) loan rules here.
Required Minimum Distributions (RMDs)
In regular circumstances, starting at age 72, you must withdraw a minimum amount from your account each year and pay income taxes on it–this is called a Required Minimum Distribution.
As a part of the CARES Act, for the calendar year 2020, no one will have to take an RMD from any individual retirement accounts (IRAs) or workplace retirement savings plans, like your 401(k).
If you don’t have need the money to pay immediate bills, letting the investments sit may help regain any losses due to recent market volatility. While we don’t yet know the long-term effect of the pandemic on the economy, if we look back over history, major events like this tend to have greater short-term impacts rather than long-term ones.