The Internal Revenue Service (IRS) recently published questions and answers (click here) regarding retirement provisions in Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition to providing the well-known stimulus aid for individuals and the Payroll Protection Program and Economic Injury Disaster Loan programs for businesses, the CARES Act increases accessibility to funds and loans from certain retirement plans and accounts. The information the IRS published clarifies which individuals may benefit from the legislation and which plans and accounts are covered.
Retirement Account Rules Established by the CARES Act
Under Section 2202 of the CARES Act, individuals may withdraw up to $100,000 in “Coronavirus-related” distributions from certain retirement accounts. Distributions are deemed “Coronavirus-related” if they are withdrawn from approved plans between January 1, 2020, and December 30, 2020, by individuals who have been adversely affected by COVID-19 in a number of specified ways (discussed below). Individuals may take distributions from 401(k), 403(b), and individual retirement accounts (IRAs). Under normal circumstances, a 10 percent penalty is imposed on distributions made from these accounts by account owners under the age of 59.5 – the CARES Act now waives this penalty.
In addition to expanding access to retirement distributions, eligible individuals may also take loans of up to $100,000 from their employer-sponsored retirement plans. Prior to the CARES Act, the limit was $50,000 or 50 percent of the vested account balance. Loans taken under this CARES Act provision must be entered into by September 22, 2020. For existing loans, payment due dates have been extended, and repayment is not required through December 31, 2020.
Like much of the legislation pertaining to COVID-19, the retirement relief sections were specifically designed to provide broad coverage. According to the IRS information, a qualified participant is eligible for the expanded access set forth in Section 2202 if the participant, the participant’s spouse, or the participant’s dependent was either diagnosed with COVID-19 using a test approved by the Centers for Disease Control and Prevention (CDC) or has experienced “adverse financial consequences” caused by COVID-19. The “financial adverse consequences” experienced by the participant must be the result of one of the following:
The participant has been quarantined, furloughed, laid off, or has experienced a reduction of work hours due to COVID-19;
The participant has been unable to work due to the lack of child care caused by COVID-19; or
The participant has had to reduce business hours or close a business the participant owns or operates due to COVID-19.
An individual who falls within any of these categories is eligible for the expanded distribution and loan options available under the CARES Act.
Additional Benefits for Individuals of Retirement Age
The CARES Act also temporarily suspends required minimum distributions (RMDs) from IRAs, and 401(k) and 403(b) retirement accounts. In general, once an individual reaches a certain age (currently 72 years old per the SECURE Act – click here to learn more about SECURE), the government mandates that the individual begin taking out a minimum distribution to ensure that these retirement funds are not left untouched indefinitely. This temporary suspension of RMDs is unique because it is not limited to retirees impacted by COVID-19. The suspension also applies to:
individuals who turned 70.5 years old in 2019 and did not take their RMDs in 2019,
individuals who are 72 years old or older, and
beneficiaries of inherited IRAs for Decedents who died before 2020.
These law changes allow retirees to keep their money invested for a longer time. If you have already taken an RMD that you were not required to due to the CARES Act, please note that you may be able to redeposit these distributions via rollover provisions, but you must act quickly. In the past, the IRS allowed the rollover of funds within sixty days of withdrawal. Under the CARES Act, however, the sixty-day rollover period has been extended to July 15, 2020.
A Word of Caution
Despite the various new options available under the CARES Act, it is critical to carefully consider whether distributions should be taken from any accounts. The tax implications of these options vary, and action should be taken only after careful consideration of an individual’s personal goals and capacity.
David Lucas is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.