CARES Act Retirement Account Rule Changes

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) aims to help Americans cope with the unprecedented financial fallout from the COVID-19 outbreak. The CARES Act made several changes to retirement plan rules that we will discuss in more detail below.

As a plan sponsor, it is important to stay up to date on changes that affect your plan. Let’s take a closer look at the retirement-related provisions in the CARES Act.

Eligibility requirements for CARES Act

To qualify for relief under the provisions of the CARES act below, the participant must have been encountered one of the following:

• Diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention
• Your spouse or dependent is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention
• Experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19
• Experienced adverse financial consequences as a result of being unable to work due to lack of childcare due to COVID-19
• Experienced adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to COVID-19.

Plan Distribution Relief provided in the CARES Act

The CARES Act allows eligible participants to take an early distribution of up to $100,000 during calendar year 2020 without paying the 10% penalty tax the law imposes on most retirement account withdrawals before an account owner meets the minimum required age of 59 1/2. In addition, the act suspends the mandatory 20% tax withholding requirement that normally applies to early distributions from 401k plans, but the distribution is still subject to income tax. The CARES Act also suspended required minimum distributions (RMD) for 2020. Before, individuals were required to take a minimum distribution from their tax-deferred retirement accounts each year.

In addition, the CARES Act gives the participant up to three years to redeposit the withdrawn money into a retirement account, which normally would only be 60 days. Plus, if the participant restores the retirement funds within three years, they won’t owe tax until they take distributions in retirement. They may, however, need to file an amended tax return to get back any tax they paid before redepositing the funds into retirement savings.

Plan Loan Relief provided in the CARES Act

Under normal requirements, participants of certain retirement accounts can borrow up to $50,000 or 50% of their vested balance, whichever is less, from their account for whatever purpose needed. The employer does not have to permit retirement plan loans, but most do. The CARES Act increases the legal loan limit up to 100% of the vested balance or $100,000, whichever is less. This option is available for any loans taken out during the six-month period from March 27, 2020 to September 23, 2020.

Participants must repay standard retirement account loans within five years, and you can generally expect to start repaying immediately, but under the CARES Act borrowers were able to forgo repayment during 2020, and start the five-year repayment clock in 2021, giving them an extra year to repay their loans. The loan will, however, continue to accrue interest in 2020.

On June 19, 2020, the IRS published Notice 2020-50 to help participants navigate relief options. The notice, titled Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act, has detailed examples of how distributions and recontributions under the expanded rules work.