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Why You Should Care About the CARES Act – Retirement Distributions

By: Diane E. Puthoff

Everywhere we turn, we hear about COVID-19 and the effect it is having our families, friends, coworkers and our society. The CARES Act, the largest emergency spending measure in our nation’s history, includes some changes to retirement plans.

If you are an employer who manages your company retirement plan or you are considering tapping into your personal retirement plan to help get through the next few months, you will want to read on!

Maybe you have been negatively impacted by COVID-19 and are in a situation where you may need your retirement funds to support your family, or an employee comes to your office asking you about this option. In order to receive a distribution without penalty, the requirements of a “qualified individual” must be met. The individual must fit into one of the following categories.

  • Be diagnosed with COVID-19;
  • Have a spouse or dependent diagnosed with COVID-19;
  • Experience adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced due to the virus. This includes an individual unable to work due to lack of child care, or closing or reducing hours of a business operated by the individual due to COVID-19.

Once an individual meets the definition of a “qualified individual” the following additional distributions are available to the individual.

Early Distribution for Coronavirus Needs:  The CARES Act provides for a waiver of 10% early distribution penalty for distributions up to $100,000 made between January 1, 2020 and December 31, 2020 to qualified individuals.  A coronavirus distribution is taxable over a 3-year period to the individual unless the individual elects to be taxed in one year.  In addition, if an individual requests a coronavirus distribution, at any time during the 3 year period following the distribution the individual may repay the coronavirus distribution back to the plan without regard to normal caps on retirement contributions.

 Plan Loans:  The CARES Act provides for an increased limit on loans to qualified individuals from a plan equal to the lesser of $100,000 or 100% of an individual’s account balance.  This change to loans is applicable from the date of enactment of the CARES Act (March 27, 2020) and continues for the next 180 days.  In addition, the due date of any loan for a qualified individual with an outstanding plan loan maturing from March 27, 2020 through December 31, 2020 is now delayed for 1 year.  Interest will continue to accrue during the delayed due date.

Required Minimum Distribution Waivers:  The CARES Act waives required minimum distributions for the 2020 calendar year for defined contribution plans under Internal Revenue Code Sections 403(a), 403(b), 457(b) and individual retirement plans.

 While the CARES Act provides some helpful support of qualified individuals, there are still questions remaining on implementation. Employers should expect to receive additional guidance and plan amendments from their respective retirement plan vendors, but more importantly employers should be ready to administer new requests for coronavirus distributions.   If you have further questions about the CARES Act retirement provisions above, or general questions about how you or your business can take advantage of other aspects of the CARES Act, the attorneys at Lane & Waterman are available to help guide you.

Diane E. Puthoff joined Lane & Waterman in 2002 following a 1-year judicial clerkship with the Iowa Supreme Court. Her practice focuses primarily on estate planning, probate, ERISA and retirement planning, not-for-profit corporate planning and governance, general for-profit corporate planning and governance, and real estate transactions.