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Jul 2020
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July 13, 2020

What Does the CARES Act Mean for Retirement Plans?

The Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, includes a number of provisions that temporarily change certain rules related to retirement plans. These changes, designed to provide financial relief to individuals and families, are highlighted below.
 
1. Waiver of Required Minimum Distributions
 
The CARES Act waives all required minimum distributions (RMDs) for IRAs, 401(k)s, 403(b)s, and other tax-favored defined contribution retirement plans for the 2020 calendar year. This waiver includes RMDs not yet taken by those who reached age 70 ½ in 2019 and would have been required to take their first RMD by April 1, 2020. The CARES Act does not affect the provisions of the SECURE Act that delay the age at which RMDs start to age 72 for anyone who did not reach age 70 ½ before January 1, 2020.
 
2.  Waiver of Penalties on Early Withdrawals from Retirement Plans
 
If an individual’s plan permits early withdrawals, the CARES Act provides that the additional 10% penalty tax, which typically applies to funds that are withdrawn from an IRA or defined contribution plan (such as a 401(k)) before reaching age 59 ½, is to be waived for withdrawals made during the 2020 calendar year by a person who (or whose family) has
 
  • Become infected with COVID-19.
  • Experienced adverse financial consequences as a result of quarantine, business closure, layoff or reduced hours due to the virus.
 
Penalty-free withdrawals are limited to $100,000 and may be repaid at any time during the three-year period following the date the withdrawal was received. The taxpayer may also elect to spread the payment of income taxes due on the withdrawal over that same three year period. 
 
3.  Changes to Retirement Plan Loans
 
If an individual’s financial need does not qualify for an early withdrawal, or the individual’s employer does not make the withdrawal right available, relief can still be sought through a retirement plan loan.
 
The CARES Act provides that the maximum permissible loan amount from certain qualified retirement plans is temporarily increased during the six-month period that began on March 27, 2020. Unless required by a plan’s terms, a reason related to COVID-19 is not required to take a loan. While the original limits were the lesser of $50,000 or 50% of the account balance, the temporary limit under the CARES Act is increased to the lesser of:
 
  • $100,000 (reduced by the amount of any outstanding loan); or
  • The participant’s account balance.
 
Individuals with outstanding loans from their plans and who have repayments due between March 27, 2020, and December 31, 2020, can also delay their loan repayments for up to one year. The existing loan repayment schedule must be adjusted to reflect the delay, and interest continues to accrue from the date the payment was originally due through the actual repayment date.
 
4.  Extension of Deadline for Plan Contributions. 
 
Because the due date for filing federal income tax returns has been postponed to July 15, 2020, the deadline for making contributions to an IRA for 2019 is also extended to July 15, 2020.   
 
 Your Warner attorney can help you determine how the CARES Act affects your circumstances and how to utilize the opportunities that are available to you under the CARES Act. Contact your Warner attorney or Beth O’Laughlin with any questions.

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