COVID-19 CARES Act Includes Changes to Retirement Account Rules
You might be aware that the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides a stimulus check to many Americans who may be suffering financially due to COVID-19. Did you know the legislation also includes changes to the requirements for distributions, loans, and other retirement account-related actions for 2020?
If you’re facing financial hardships due to COVID 19, these retirement account provisions in the CARES Act might help you.
COVID-19 Exceptions for Distributions
The legislation allows certain qualified individuals to take an early distribution from their IRA without facing penalties.
Which plans are included?
Retirement plans and IRAs are eligible for this exception.
Who does this apply to?
The exception applies to:
- individuals diagnosed with COVID-19 by a test approved by the CDC
- person who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or suffered reduced working hours or who is unable to work due to lack of childcare
Details of the exception
The 10-percent penalty is waived for premature distributions related to the coronavirus, not to exceed $100,000 from all of your plans.
Amounts distributed may be repaid over a three-year period (beginning with the distribution date). It can be paid to a qualified plan or IRA (doesn’t have to be the same plan from which it was withdrawn). A plan may rely on a certification provided by the participant to demonstrate that they are in one of the applicable categories
If the distribution is not repaid, the taxpayer can spread out the income inclusion over three years, beginning with the year in which the distribution occurred.
401(k) Distributions and Loans
The CARES act makes it possible for you to take loans or hardship distributions from your 401(k) if you’re diagnosed with coronavirus.
Hardship Distribution
Coronavirus distributions are deemed permissible as a “hardship distribution” of up to $100,000.
Who is eligible?
This applies to:
- individuals diagnosed with COVID-19 by a test approved by the CDC
- person who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or suffered reduced working hours or who is unable to work due to lack of childcare
Details of the hardship distribution
Amounts distributed may be repaid over a three-year period (beginning with the distribution date). It can be paid to a qualified plan or IRA (doesn’t have to be the same plan from which it was withdrawn). A plan may rely on a certification provided by the participant to demonstrate that they are in one of the applicable categories
If the distribution is not repaid, the taxpayer can spread out the income inclusion over three years, beginning with the year in which the distribution occurred.
Loans from 401(k)s
For those considering taking a loan from a 401(k), the loan maximum is now the lesser of $100,000 or 100 percent of the present value of the participant’s benefit (previously $50,000 and 50 percent).
Outstanding loans
For outstanding loans that are due for repayment between now and December 31, 2020, repayment may be delayed for one year from the original due date (be aware that interest will accrue).
The five-year limit on loan repayments disregards the one-year delay for 2020.
Required Minimum Distributions (RMDs)
If you’re an IRA account holder who was required to take required minimum distributions (RMDs) in 2020, you are no longer required to take one for the year.
Which RMDs are included?
The waiver applies to 2019 RMDs that must be taken by April 1, 2020, as well as 2020 RMDs that must be taken by April 1, 2021. If you have already taken your RMD, you can roll over that RMD into a retirement plan.
What are the exceptions?
This does not apply to defined benefit plans.
Defined Benefit Funding Rules
Contribution rules for defined benefit plans have also been affected as part of the CARES Act.
Details of the exception
Payment of a minimum required contribution that would otherwise be due (both quarterly and year-end) during calendar year 2020, may be delayed until January 1, 2021.
The contribution will be increased by interest for the period between when the original contribution was due and actual payment date.
More COVID-19 Resources
Visit our COVID-19 Resource Center for more helpful information about coping with this pandemic.
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