The CARES Act and Retirement Plan Changes
Congress passed and the President signed on March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Act includes several significant provisions, most notably cash payments to many taxpayers and numerous provisions to shore up industries feeling the crush of the coronavirus. Included in the Act are several provisions affecting retirement plans. As general rule, these provisions apply both to company plans and IRAs.
Plan participants may take $100,000 in coronavirus-related distributions from their retirement plan accounts. There is no 10 percent early distribution penalty.
This distribution is not taxable income, unless it is not repaid within three years. As a distribution, it does not bear interest. If it is not repaid within the three years, it is taxable income spread over three years, 2020, 2021 and 2022, which will require amending prior years’ income tax returns.
Because it covers 2020 distributions starting January 1, it would appear that distributions taken this year can be included as non-taxable distributions. Recipients will be asked to sign a form saying that the distribution was related to the effects of the virus, and the Plan can rely on the statement. It does not appear that the statement is required for any other Plan benefit of the Act.
Most retirees must take a required minimum distribution (“RMD”) each year. That requirement is waived for 2020. This is especially useful because most RMDs were based on December 31 of the prior year, and because most participant’s accounts have fallen significantly they won’t have to base RMDs on the bigger number. Most plans invest in stocks, and the Dow Jones average is down almost 25 percent as of this writing.
IRA contributions for 2019 could be made by April 15, but since the tax filing deadline has been pushed back to July 15, the 2020 contributions may also be made by July 15 this year. This also applies to contributions to some health and educational savings accounts.
Restrictions on participant loans in company plans have been substantially loosened for loans made within six months after enactment. For the rest of 2020, what was a $50,000 limit Is now $100,000 (less existing loans). What was a limit to 50 percent of the participant’s vested interest, is now 100 percent of the vested interest. How this would be calculated in light of the drop in value of participants’ account is unclear because it would not make sense to be able to borrow more than their true vested interest.
In addition, loan payments which would otherwise be due between enactment and December 31 may be pushed back a year.
As with any law passed without careful scrutiny, there will undoubtedly be regulations, technical corrections and other clarifications to come.
Plan participants will have to consider the advantages and disadvantages of utilizing these new provisions, and plan administrators will need to prepare the plan for potentially increased cash needs.
Michael Hackman is a State Bar of California Certified Tax Specialist, and Trust & Estate Planning attorney at our firm.
This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.