CARES Act Update: Retirement Plan Relief

By Richard A. Naegele, Esq.

The retirement savings of the American people have been devastated by the economic impacts of the coronavirus pandemic. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes a series of provisions intended to help American’s retirement savings recover once the crisis abates.

There are three primary retirement relief provisions in the CARES Act:

  • No Required Minimum Distribution (RMD) for 2020;
  • Penalty Free Distribution of up to $100,000; and
  • Increase in Plan Loan Limits and One Year Deferment of Repayment.

However, as with all of the other CARES Act programs not all details for the programs have been provided. It appears that the increased distribution and loan rules are discretionary with the employer / plan sponsor. Plan sponsors may implement such provisions currently and have until the end of the plan year beginning in 2022 to formally adopt such amendments.

Waiver of RMDs for 2020

This provision seeks to avoid forcing account owners to sell stocks, being held by retirement accounts and other qualified plans, at a low value in order to take inflated RMDs calculated on the basis of the account balance as it stood on December 31, 2019. This provision puts control back in the hands of the account owners. With the devastating impact of pandemic on the markets, most Americans have seen a large decline in the value of their retirement savings. By suspending RMDs Americans can now choose to forego any distributions while they wait for the markets to recover, while other provisions (discussed below) will allow account owners to choose to take distributions or loans under more favorable tax conditions.

As a result of this provision, defined contribution plans, like 401(k)s, 403(b)s, 457(b) plans, and IRAs, may suspend RMDs in 2020, this includes those who turned 70.5 in 2019 and had to take their RMD by April 1, 2020 and those who turn 72 in 2020. This waiver allows account owners to skip both their 2019 RMD if it was their first year and had not yet made an RMD by April 1, 2020, and their 2020 RMD.

The SECURE Act passed in December, 2019 increased the age for the required beginning date for RMDs from age 70.5 (for individuals who attained age 70.5 on or before December 31, 2019) to Age 72 for individuals who attain age 70.5 after December 31, 2019.

Penalty Free Distributions up to $100,000

If a plan participant is a “Qualified Individual” (defined below) who has suffered financial consequences as a direct result of COVID-19 or who has a family member diagnosed with COVID-19, the participant can request distributions in 2020 up to $100,000 from their retirement plan accounts. These distributions can be repaid to the plan over the next three years and are exempt from the usual 10% penalty on distributions to individuals under the age of 59.5. Furthermore, though taxable, taxes on these distributions can be taken into income over a three-year period, thereby spreading the tax burden out over those three years. Finally, to help expedite these distributions, employers are entitled to rely on self-certification by the account owner that the conditions for eligibility exist.

Temporary Increase in Limits on Loans from Tax Qualified Retirement Plans

If an account owner, their spouse, or dependents have suffered financial consequences as a direct result of COVID-19, the individual can request a plan loan between the date of enactment of the CARES Act (March 27, 2020) and 180 days after such date up to the lesser of $100,000 or their vested account balance and repayment may be deferred for one year. These are temporary increases from the statutory loan limitations of the lesser of $50,000 or 50% of a participant’s vested interest in the plan. Furthermore, repayment on existing plan loan payments due after enactment of the CARES Act and before December 31, 2020 shall be postponed for one year. The normal five-year repayment period on plan loans is extended to include such delay period.

Qualified Individuals Eligible for the Enhanced Distribution and Loan Provisions.

The increased Retirement Plan Distribution provisions and Loan Provisions are available to “qualified individuals”. As noted above, the Plan can rely on an individual’s self-certification as a qualified individual. A qualified individual is an individual:

  • Who is diagnosed with COVID-19;
  • Whose spouse or child is diagnosed with COVID-19;
  • Who experiences adverse financial consequences as a result of quarantine or work issues related to COVID-19;
  • Who is unable to work due to child care issues as a result of COVID-19;
  • Who has closed or reduced hours in a business owned or operated by the individual as a result of COVID-19.

These provisions provide another layer of relief for Americans struggling with the financial impact of the coronavirus pandemic. Please contact your WHP counsel with any questions you have regarding these and other provisions of the CARES Act.

 

This article provides an overview and summary of the matters described therein.  It is not intended to be and should not be construed as legal advice on the particular subject.