CARES Act brings relief for retirement plan participants
Sections 2202 and 2203 of the Coronavirus Aid, Relief and Economic Security (CARES) Act (the “Act”) change some of the rules applicable to most retirement plans. Specifically, Section 2202 of the Act creates a special retirement plan distribution option referred to as a “coronavirus-related distribution,” (CRD). In 2020, a participant can take a CRD from an employer sponsored retirement plan such as a 401(k) or IRA in any amount up to $100,000. The CRD is not subject to the mandatory tax withholding. The 10% penalty levied on early plan distributions is waived. Moreover, the individual taking a CRD can elect to apportion the distribution, ratably, over three years for income tax purposes. The individual can contribute to the plan an amount up to the value of the distribution in one or more payments at any time during the three-year period beginning on the day after the distribution is received. The contribution is treated as a direct trustee to trustee transfer and is therefore subject to annual contribution limits.
To be eligible for a CRD, participants will have to self-certify that they are a “qualified individual.” A qualified individual is defined as:
An individual (1) who is diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury secretary.
A participant who is not a qualified individual may still be eligible to receive hardship distributions from a retirement plan that permits hardship distributions if the participant lives or works in a FEMA declared disaster area.
Increased loan amounts for 2020 from employer sponsored plans
Other provisions of Section 2202 double the amount that participants of employer-sponsored plans can borrow from the lesser of 50% of the participant’s vested interest or $50,000 to the lesser of 100% of the participant’s vested interest or $100,000. The Act also extends by one year loan repayments due in 2020 for participants with outstanding loans made prior to the Act’s existing loan repayment periods.
Temporary suspension of minimum required distributions
Section 2203 of the Act suspends minimum required distribution (MRD) requirements for traditional and inherited IRAs and for most qualified plans for 2020. This new requirement applies to IRA owners who turned 70 1/2 in 2019 and whose first MRD for 2019 is required to be taken by April 1, 2020. Also, individuals who may have inherited through a will or as beneficiary of a trust without a qualified beneficiary and who are subject to the “5 year rule” can now add one more year to the mandatory withdrawal date.
Christopher R. Paul
Chris Paul is a Director at McLane Middleton and Chair of the firm’s Trusts and Estates Department. He concentrates his practice on trust, estate, income, and transfer tax planning for families and individuals including advising clients in business succession planning, wealth preservation, asset protection, and charitable giving. Chris also represents fiduciaries and beneficiaries in trust and estate administration.