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UPDATED – Retirement Savers, Retirees Receive Penalty-Free Financial Relief Under CARES Act by Joanie B. Stein, CPA

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Posted on May 20, 2020 by Joanie Stein

The CARES Act lifts restrictions on 401(k) plans, IRAs and certain other retirement savings plans to provide plan participants with immediate financial assistance and make it easier for employers to adopt these critical relief provision. It is important for plan sponsors to weigh the benefits of these relief measures and recognize the specific administrative rules they must follow to adopt these changes to their plans.

Coronavirus-Related Retirement Plan Distributions

Qualifying individuals younger than 59 ½ may withdraw up to $100,000 from their retirement plans during 2020, without incurring the 10 percent early-withdrawal penalty that would otherwise apply or the 20 percent federal withholding tax. The IRS will treat these distributions as taxable income to account owners over a three-year period unless owners elect-out of this option. Taxpayers also have the choice to avoid income recognition when they repay these distributions to their company’s 401(k) or to an IRA within three years.

These hardship distributions are available to individuals who receive a coronavirus diagnosis or have a spouse or dependent diagnosed with coronavirus, or any retirement savers who experience financial hardship due to the economic fallout from the virus. This includes individuals who are quarantined, furloughed, laid off, working reduced hours, and those unable to work due to lack of child-care, business closings or other factors as determined by the Secretary of the Treasury.

Retirement Plan Loans

Taxpayers eligible for COVID-19-related retirement plan early distributions also have the option to borrow from their qualified contribution plans up to $100,000 or 100 percent of their vested account balance, whichever is less. Borrowers have up to five years to repay these loans, which must be taken by Sept. 22, 2020. If a plan participant has an existing retirement plan loan with any payments due from March 27 through Dec. 31, 2020, they may delay that payment for no more than one year.

Required Minimum Distributions (RMD) for Retirees

Individuals age 70 ½ or older who are typically required to take annual minimum distributions from their IRAs, 401(k)s, 403(b)s and government 457(b) plans, may forgo those RMDs in 2020. With this waiver, retirees may keep money in their retirement accounts, which may have suffered from the recent market volatility, thus allowing those investments to recover and continue to grow. The CARES Act also eases the administrative burden by allowing employees to self-certify that they are qualified individuals.

Requirements for Amending Plans

 While employers may adopt these COVID-19 relief provisions immediately, the CARES Act fives them until the last day of the first plan year beginning on or after January 1, 2022, to amend their plan documents.
Retirement plan sponsors and participants wishing to take advantage of this relief should work with their professional accountants and financial advisors to ensure their actions meet regulatory compliance.

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely-held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.