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The CARES Act: Retirement Plan Provisions

Posted By Administration, Thursday, April 2, 2020

savings

By Alera Group

On March 27, 2020, the president signed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which includes several provisions impacting retirement plans.

Withdrawal Provisions

The CARES ACT waives the 10% early withdrawal penalty tax on “Coronavirus Related Distributions” from a retirement plan or IRA. A “Coronavirus Related Distribution” is a distribution taken prior to December 31, 2020, for an individual:

  • Who is diagnosed with COVID-19;
  • Whose spouse or dependent is diagnosed with COVID-19;
  • Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, or closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
  • Who meets other criteria determined by the Secretary of the Treasury.

The administrator of the plan can rely on an employee’s certification that the employee satisfies one of the conditions for a Coronavirus Related Distribution.

One hundred thousand dollars is the maximum amount an individual can withdraw as a Coronavirus Related Distribution. In addition to avoiding the penalty, under the law, individuals can pay the income tax on the amount of the withdrawal ratably over a three-year period. Also, the law permits individuals to repay the amount distributed back to the plan tax-free. Any repayment will not be subject to the retirement plan contribution limits. When a participant repays the hardship distribution, they will need to file an amended tax return.

We recommend that any withdrawals be discussed with a participant’s accountant and financial advisor prior to taking action.

Loan Provisions

The CARES Act enhanced the regular plan loan provisions for a loan taken by an individual that meets the requirements for a Coronavirus Related Distribution. Under the act, a participant who meets the requirements can take up to the lesser of 100% of their vested balance, up to $100,000, for loans taken within 180 days of March 27, 2020.

The act also provides that for “qualified individuals,” any repayment that would otherwise be owed on a plan loan through the end of 2020 may be delayed for up to one year.

Minimum Required Distributions

The CARES Act waives the required minimum distributions (RMD) from retirement plans and IRAs for 2020. This applies to the RMD for 2020, but also to the RMD that is required to be taken before April 1, 2020, for individuals who turned 70½ in 2019.

Our Insight

The withdrawal provision is helpful to participants who need access to money because of the impact of the coronavirus. The waiver of the 10% penalty tax and allowing the regular income tax to be paid over three years are both very beneficial provisions for participants. However, here are consequences participants should consider:

  • Perhaps most importantly, the longer-term impact that taking money out of a retirement plan will have on retirement savings;
  • The impact of taking a withdrawal after a steep market decline. The participant may be selling when the fund values are low and thereby locking in losses;
  • Whether paying all the tax in the current year is more advantageous than spreading the tax over three years; and
  • Other sources of liquidity to consider using first.

Participants contemplating taking a loan also should consider the impact the loan will have on their retirement savings and the potential loss of future positive returns should the market recover from the significant market decline we have recently experienced.

Plan recordkeepers are in the process of setting up procedures for implementing this provision.  Under the CARES Act, plans can implement the changes immediately and have until the last day of the first plan year beginning on or after January 1, 2022, to make the required amendment.

Alera Group is an independent, national insurance and financial services firm created through the merger of like-minded, high-performing, entrepreneurial firms across the United States.

The information provided in this alert is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the agency, our employee or our clients. This is not legal advice and no client-lawyer relationship between you and Alera or you and Triad or any of their employees is, or may be, created by your use of this information. Rather, the content is intended as a general overview of the subject matter covered.  Alera and Triad are not obligated to provide updates on the information presented herein. Those reading this alert are encouraged to seek direct counsel on legal questions.

"Alera Wealth Management" is a brand name utilized by Alera Group, Inc, Alera Investment Advisors, LLC and certain subsidiaries and affiliates (collectively "Alera").

Certain individuals associated with Alera offer investment advisory services through Alera Investment Advisors, LLC and are registered to offer securities through Triad Advisors, LLC, Member FINRA/SIPC. Additional information about individuals registered with FINRA can be found on FINRA's BrokerCheck.

Alera is not affiliated with Triad Advisors, LLC.

Tags:  Business and Financials  COVID-19  Guest Post 

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