Retirement Law Changes Under CARES

The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) includes very important changes to the law regarding withdrawals from retirement plans and accounts. Because so many Americans need immediate access to cash during this crisis, the rules about withdrawing funds from qualified retirement plans and IRAs have changed.

Starting on January 1 of this year and continuing through the end of the year, “qualified individuals” may withdraw up to $100,000 from their plans or accounts. This means a total of this amount across all accounts, not $100,000 from each account.  In order for an employee to be able to withdraw these funds, the Plan must adopt a provision permitting the withdrawal. The Plan then has until 2022 to formally amend its plan documents. An employer is not required to adopt these provisions. It is up to the individual Plan

These distributions will not be subject to the 10% early distribution penalty that would normally apply to any withdrawals prior to age 59 ½.  The withdrawals will also not be subject to the automatic 20% withholding of taxes from withdrawals. Instead, withholding of 10% will apply unless the participant or account holder opts to have no withholding at all.

The withdrawn amounts can be repaid to the Plan or account within three years from the withdrawal. The amount withdrawn will be taxed over a three-year period unless paid back.

You are a qualifying individual if you have been diagnosed with COVID-19 or your spouse has been diagnosed. You are also a qualified individual is your income has suffered negative financial consequences related to employment because of the virus.  If you have been laid off, furloughed, had reduced work hours, had your business close or your employer’s business close, or if you have no ability to have child care and thus must stay home, you are a qualified individual. Other factors that may be identified later.

Additionally, the rules about retirement plan loans have changed. If your retirement plan offers loans (or will now begin to offer loans), the maximum loan amount taken within 180 days of the enactment of CARES is now the lesser of $100,000 or 100% of the Plan balance.  Additionally, there are new rules regarding the repayment of these loans. Again, the Plan must adopt a provision permitting these changes and the Plan has until 2022 to amend the Plan. Like the withdrawals, these provisions are optional for the Plan.

Finally, the requirement to take Required Minimum Distributions from an account or Plan have been waived for 2020. This is the only provision of the CARES act that doesn’t require any Plan changes.

Please check with your employer as to whether your employer-sponsored Plan will adopt a provision permitting the withdrawals.  If you have an IRA, you will be able to take advantage of these provisions immediately. All the above provisions will provide a safety net for many people who otherwise have no access to funds during this crisis. If you qualify, do not hesitate to take advantage of these new emergency provisions.

For more information, please see the attached article from Tri-State Plan Administration, Inc. (TPA), which contains additional information about loan repayment, minimum distributions from Plans, etc.