In response to the COVID-19 pandemic, Congress passed the CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT (CARES Act) on March 27, 2020.  The bill provides financial aid for individuals and companies.  The CARES Act also has provisions allowing access to retirement savings and suspension of required minimum distributions.  These provisions are summarized below.

Special Rules for Use of Retirement Funds

1. Waiver of the 10% early distribution penalty tax (for distributions made before age 59 ½) for coronavirus-related distributions

    • The 10% penalty tax does not apply to coronavirus-related distributions up to $100,000 per individual (limit applied across all plans and IRAs).
    • A distribution can be repaid within three years of the date of the distribution to any plan or IRA to which a rollover contribution can be made.  Repayments will be treated as rollover contributions.
    • Regular income taxes due on the distribution will be spread over three years unless the person taking the distribution elects otherwise.  The 20% withholding is not required.
    • A “coronavirus-related distribution” includes any distribution made in 2020 to a person who has one of the following:
      • A personal diagnosis of COVID-19 by a test approved by the Centers for Disease Control and Prevention.
      • A spouse or dependent who has been diagnosed.
      • Adverse financial consequences due to being furloughed, quarantined or laid off or having their paid work hours reduced due to coronavirus or the close or reduction of a business due to coronavirus.

2. Increased loan limit and extension of repayment period

    • A qualified loan is any new or pre-existing loan to a person who would be eligible to receive a corona virus-related distributions.
    • Maximum loan amount for qualified loans is increased from $50,000 or 50% of the vested account balance to $100,000 or 100% of the vested balance.
    • For any person who meets the coronavirus-related distribution definition, who has an outstanding loan balance on or after the date of enactment and loan payments due from date of enactment through December 31, 2020, payments are delayed by one year.
    • All subsequent payments will be adjusted to take into account the delay and the interest accrued during the delay.  The five-year loan limit may be disregarded for this purpose.

Temporary Waiver of RMDs

3. Waiver of required minimum distributions (RMDs) due in 2020

    • Any RMD required to be made in calendar year 2020 is waived.  This includes RMDs due as a death benefit in accordance with the five- and 10-year rules, and those time limits are extended by one year.
    • This applies to 401(k), 403(b) plans and IRAs.  This does not apply to Defined Benefit Plans.

It is likely that Congress may consider additional measures in the days to come.  As always, we here at Pension Parameters Financial Services, Inc. will keep you apprised of all new developments.