How the CARES Act Affects Retirement Plans
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The CARES Act, a bipartisan stimulus bill, has been signed into law, as of March 27 of 2020. The bill contains retirement plan provisions intended to assist IRA and employer sponsored plan participants during the COVID-19 pandemic.
Let’s discuss some notable features of the CARES Act that could affect IRA and employer plan sponsors.
2020 RMDs Waived
The requirement for individuals to take an RMD by April 1 of 2020 for tax year 2019 has been waived. RMDs due on December 31, 2020 for tax year 2020 are also waived. This reprieve from taking RMDs in 2020 includes Traditional IRA holders, their beneficiaries, and Roth IRA beneficiaries. This provision provides relief to those whose retirement plan assets have diminished in value as a result of the pandemic.
Distributions taken before the bill passed cannot be undone. However, it hasn’t been clarified whether prior distributions can be rolled back within the 60-day period.
Disaster Relief Distributions, Penalty Free
The stimulus bill contains disaster relief provisions. Disaster related distributions of up to $100,000 may be distributed penalty free. The tax liability is not waived on the distributions but may be spread across three tax years into three equal amounts. Spreading the taxation over a three-year period should lessen the tax burden on the taxpayer. The amount of the distribution already taxed may be repaid three years from the day after the date of each distribution.
If the disaster relief provision passes, it’s anticipated that taxpayers will be required to file a form similar or identical to IRS Form 8915-B to declare the distribution as part of the disaster relief provision. Taxpayers can refer to IRS Form 8915-B for more information.
However, it is only advisable to take retirement plans distribution as a last resort. Retirement plan participants may want to consider tapping into other sources of income prior to their retirement savings. As retirement plan nest eggs are intended for future use, it may be detrimental to prematurely reduce or deplete retirement plan assets.
401(k) Plan Loans Increased
Normally, 401(k) profit sharing plans that have adopted the loan provision under a plan allow participants to borrow up to the lesser of 50% of their vested balance up to $50,000. The amortization of the loan cannot be longer than 5 years (unless it’s for purchasing a primary residence) and must be paid quarterly to avoid taxation and penalty. The CARES Act increases that 50% to 100% of a plan participant’s vested balance, and increases the $50,000 cap to $100,000.
Although it might sound enticing, the loan must be repaid back quarterly to avoid taxation and penalty on the unpaid balance. Payments are typically required to be made via the participant’s payroll. If the participant loses their job, defaulting on the loan may be the only recourse on the remaining loan balance.
Payments on current 401(k) loans can be delayed for a year per the CARES Act.
The provisions of the CARES Act are intended to ease some of the financial strain many families are currently experiencing due to the COVID-19 pandemic. There are still questions outstanding that the US Treasury will need to answer once the bill is signed into law.