How the CARES Act Impacts Retirement Plans

Retirement Director Ben Rizzuto outlines some of the key retirement-related provisions included in the recently passed CARES Act stimulus package, including changes to plan distribution requirements and a temporary waiver of required minimum distributions.

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law by President Trump on March 27 and provides $2.2 trillion in stimulus to American individuals and businesses that have been hit hard by the COVID-19 pandemic.

The sheer size of this economic relief package is astounding and unprecedented. Some sources estimate that the package equates to roughly 10% of the United States’ yearly gross domestic product, or about half of the entire annual federal budget.1

While the direct payments Americans will receive have gotten the lion’s share of the extensive media coverage on the package, there are several retirement-related items that deserve attention.

Retirement Plan Distribution Provision (Section 2202)

This provision mirrors many of the natural disaster-related provisions we have seen in the recent past. The CARES Act allows participants to take distributions in 2020 of up to $100,000 from employer-sponsored retirement plans, IRAs or a combination of both.

These distributions will not be subject to the 10% premature distribution penalty, nor will they be subject to the 20% withholding requirement. Going forward, the distribution amount may be repaid to the plan either as a one-time payment or in multiple payments over three years from the date it is received. From a tax standpoint, the income is automatically spread evenly over the next three tax years, although taxpayers also have the option to include the full amount in their 2020 income taxes.

Several requirements could be used to qualify these distributions for tax deferral, including (among others):

  • An individual or an individual’s spouse being diagnosed with COVID-19
  • Adverse financial consequences experienced as a result of being quarantined, furloughed, laid off or having work hours reduced due to the disease
  • The inability to work because of a lack of childcare as a result of the disease

Plan sponsors are not required to permit these withdrawals. However, if they choose to do so, administration and compliance with this new rule has been made relatively easy as sponsors can rely on a participant’s certification of their eligibility for the distribution.

Individuals affected by COVID-19 may also take loans from their retirement plans, with the amount available increased to the lesser of $100,000 or 100% of the participant’s vested balance.

Temporary Waiver of Required Minimum Distributions (Section 2203)

Over the past few months, required minimum distributions (RMDs) have received considerable news coverage. The SECURE Act changed the RMD age to 72; the CARES Act has now suspended this requirement for 2020 altogether.

The RMD suspension applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b), and Governmental 457(b) plans. Furthermore, this provision applies not only to retirement account owners, but also beneficiaries taking stretch distributions. Individuals who have already taken their RMD for 2020 will be able to return the distribution to their plan while those who turned 70 ½ last year and were planning to take their first RMD by April 1 are now off the hook for their 2019 and 2020 RMD.

The above is a high-level summary of a few of the provisions that the CARES Act has established to provide individuals and plan participants with access to greater liquidity. It remains to be seen whether the CARES Act ultimately achieves its goal of helping sustain Americans financially or whether further stimulus is needed based on how the COVID-19 pandemic and its economic impacts unfold.

 

1“Trump signs $2.2 trillion coronavirus rescue package after swift congressional votes.” Associated Press, March 27, 2020.