CARES Act Expands Rules for Retirement

RETIREMENT PLANS 2020

Coronavirus Aid, Relief, and Economic Security (CARES) Act Expands Rules for Retirement Plans in 2020 Tax Year

The CARES Act enables retirement plan participants to access their retirement accounts for financial emergencies resulting from COVID-19. This Act, signed into law on March 27, 2020, includes new increases in hardship distributions and loan provisions, as well as new rules for other plan requirements, specifically related to the coronavirus.

Hardship distributions due to COVID-19 in 2020 tax year

New guidelines include:

  • Withdrawals have been increased from $50,000 up to $100,000
  • Can be taken from qualified retirement plans, including 401(k), IRA, and 403(b), or a combination of plans
  • Distributions must be made within the 2020 calendar year

Taxpayers must meet requirements that include:

  • Have been diagnosed with COVID-19 by a CDC-approved test
  • Have a spouse or dependent who has been diagnosed with COVID-19
  • Experiencing adverse financial consequences resulting from being quarantined, furloughed, laid off, reduced hours, or inability to work due to lack of childcare
  • Own a business that closed or operated under reduced hours because of the virus
  • Meet other reasons as determined by the IRS

Benefits of distributions under COVID-19 rules include

  • 10% early-withdrawal penalty is waived
  • 100% of vested balance may be used
  • Not subject to mandatory 20% income tax withholding if from an employer plan
  • Can be repaid to a plan or IRA over three years
  • Distribution is still taxable, but taxes can be paid over three years

Loans due to COVID-19 in 2020 tax year:

Rules for retirement plan loans have been significantly expanded:

  • Participants may take loans on defined contribution accounts (e.g., 401(k) or 403(b), up to $100,000 or the entire vested account balance if less than $100,000 (previously limited to $50,000 or 50% of vested balance)
  • Loans may be taken up to September 23, 2020 (six months from approval of CARES Act)
  • Repayments from March 27, 2020 (enactment of CARES) through December 31, 2020 may be delayed up to one year on new loans or existing loans
  • Individual retirement accounts are not included.
  • Participants will not own income tax on the amount borrowed if the loan is paid back within five years.

Required Minimum Distributions (RMDs) have been suspended for 2020:

Rules typically require plan participants over 70½ to take a yearly portion of accounts:

  • This includes IRAs, employer retirement plans, 403(b) and 457(b) plans, and is based on values of accounts on December 31 of the previous year
  • However, due to extreme market volatility caused by COVID-19, December 31, 2019 valuations could lead to disproportionately larger taxable distributions on reduced account balances
  • Taxpayers who don’t need RMDs this year can consider leaving the funds in their retirement plans

For RMDs that have already been taken in 2020:

  • Taxpayers have up to 60 days to return the money to an IRA or deposit it in another qualified retirement account without owing taxes
  • The amount can also be converted into a Roth IRA
  • The 5-year rule will not apply for 2020
  • Stretch IRA RMDs are suspended
  • First-time RMDs that may have been deferred from 2019 calendar year are also suspended
  • There is NO option to roll back for beneficiary RMDs from inherited accounts

For more information on IRA And Retirement Plan Changes In The CARES Act, view the March 28, 2020, Forbes article.

Baker Avenue Asset Management, LP is neither an attorney nor accountant and no portion of the website content should be interpreted as legal, accounting or tax advice. Click here to view BakerAvenue’s full disclosures.

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