CARES Act And Retirement Plan Provisions
Updated : August 4th, 2020
On March 27, the U.S. Congress announced the Coronavirus Aid, Relief, And Security (CARES) Act. This act includes wide-ranging implications, including changes to unemployment insurance benefits, support to businesses, and self-employed. The CARES Act also consists of a retirement plan and Individual Retirement Account (IRA) provisions. In this article, we will walk you through the retirement plan provisions under the CARES Act.
The Coronavirus-Related Distributions
The CARES Act allows plan sponsors (company or employer) to offer a new type of distribution known as the Coronavirus-Related Distribution (CRD). This distribution can be made from qualifying retirement plans that start on January 1, 2020, and end on December 30, 2020.
Eligibility For Coronavirus-Related Distributions
To qualify for the coronavirus-related distribution, you must be a “coronavirus-affected individual.” That is,
- You are diagnosed with the Coronavirus by a Centers for Disease Control(CDC) approved test
- Your dependent or spouse is diagnosed with the Coronavirus by a(CDC) approved test
- You are unable to take employment due to the Coronavirus child care issue
- You experience the adverse financial problem as a result of being quarantined, reduced work hours, laid off, or furloughed due to the Coronavirus
- You have experienced other factors as listed by the Secretary of the Treasury
- You have closed your business or reduced work hours
The plan administrator may rely on your certification to determine if you satisfy the criteria to be a coronavirus-affected individual.
Required Minimum Distributions
For 2020, Required Minimum Distributions (RMDs) needed for defined contribution retirement plans need not be made. This applies to certain retirement plans and IRA accounts, including:
- Defined contribution 401(a) qualified plans including 401(k) and profit-sharing plans
- Government defined contribution 457(b)
- Defined contribution 403(a) and 403(b) plans
The suspension of the RMD applies to those who have attained the age of 70 1/2 before January 1, 2020. If you have turned 70 1/2 in 2019 and were waiting to take your 2019 distribution, you need not take your 2019 or 2020 RMD. If you have already taken your 2019 or 2020 RMD but is still within 60 days from the RMD date, then you can roll back your distribution to a qualified plan or IRA to avoid any penalty.
Can You Take Loans From Your Qualified Retirement Plan?
The CARES Act allows you to take loans from your employer-sponsored retirement plans to meet your financial needs during a crisis. Earlier, the loan limit was $50,000, but the Cares Act has temporarily increased the loan limit to $100,000.
The CARES Act has also shelved the rule that limits the individual to borrow their fully vested balance up to 5-%. It now allows you to borrow up to 100 % of your vested amount. For instance, if you have $20,000 in your 401(k), you can borrow the entire amount.
Should You Pay Taxes On Withdrawing Money From Your Retirement Plan?
Coronavirus-Related Distributions are not subject to federal income taxation. However, the amount of the CRD is included in gross income for federal tax over the 3-taxable-year beginning with 2020. You can choose to include the total amount of the CRD in gross income for federal tax for 2020 than spreading it over 3 years.
You can pay the money to an eligible retirement plan during the 3-year period that starts on the day after the distribution date. Repayments within the 3-year will result in the CRD not being subject to federal income taxes. But if the federal income tax has been paid already, then the authorities may permit you to receive a refund of that amount.
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