CARES Act – Retirement Plan Opportunities
The number of restrictions and changes created by the COVID-19 emergency has left many business owners and employees with more questions than answers. The effect of stay at home orders and forced business closures have resulted in a drastic reduction in demand for certain products and many services. The combination of efforts to limit large gatherings along with concern about transmission has left businesses without needed revenue and individuals with no job. This is reflected in the April 16th national unemployment numbers showing that 22 million Americans are currently unemployed. Given the enormity of the issue, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the Act), providing $2 trillion worth of relief to help those impacted. While much attention has been given to the tax incentives, loan programs, and unemployment funding to deter layoffs, there were also retirement plan changes included, to allow individuals easier access to much-needed funds and more. To help clients, prospects, and others, Klatzkin has provided a summary of key changes below.
CARES Act – Retirement Plan Provisions
- Coronavirus Related Distributions – The Act permits a special hardship distribution for participants in 401k and IRA plans affected by COVID-19. These distributions are not subject to the 10% early distribution penalty and can be repaid over three years. The amount of distribution cannot exceed $100,000 per participant. Also, the 10% penalty waiver applies retroactively to January 1, 2020, if the participant has received a COVID-19 diagnosis, spouse or dependent has received a diagnosis or they experience adverse financial conditions as a result of the emergency.
- Expansion of 401(k) Loans – The Act also doubles the current retirement plan loan limit to lesser than 100% of the vested account balance or $100,000, through the end of 2020. Before the change, loan limits were limited to the lesser of $50,000 or 50% of the participant’s account balance. Individuals with outstanding plan loans with scheduled repayment between March 27, 2020, and December 31, 2020, can delay repayments for up to one year.
- Required Minimum Distribution (RMD) Waiver – Under the existing rules, a retiree with a 401(k) or IRA is required to start taking distributions upon reaching the age of 70 ½ or 72 ½ (for those who turned 70 after July 1, 2019). The Act provides relief to these individuals for the calendar year 2020 who would otherwise be required to take distributions from accounts impacted by market declines. It is important to note this change applies to all individuals whether or not COVID-19 has impacted them.
- Single-Employer Defined Benefit Plan Contributions – The Act now permits required minimum contributions that are due in 2020 to be delayed until January 1, 2021. It’s important to note the interest accrued from the original required contribution to the payment date is due along with the delayed contribution.
- Extended Contribution Deadlines – Participants now have until July 15, 2020, to make 2019 contributions to IRA and other qualified benefit plans. It’s important to note these changes were not part of the Act (as the IRS tax deadline extension created them) but provide another opportunity for impacted individuals.
Many individuals need to use their retirement savings as a short-term funding source until the COVID-19 emergency is over. The changes discussed above are designed to supplement expanded unemployment and other relief in the CARES Act. If you have questions about the information outlined above or need assistance with a COVID-19 issue, Klatzkin can help. For additional information, click here to contact us. We look forward to hearing from you soon.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.