What does the federal government’s COVID-19 Response legislation mean to retirement plans?

The recently passed Coronavirus Aid, Relief, and Economic Security Act or the CARES Act, contains relief and assistance for qualified retirement plans and their participants. These retirement plan enhancements include dramatically expanded hardship distribution provisions, significantly larger participant loans and numerous other features that plan sponsors should be aware of.

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The CARES Act, which was signed into law in March 2020, includes several provisions aimed at providing relief to individuals and businesses impacted by the COVID-19 pandemic. Among these provisions are key changes to retirement plan rules, designed to give individuals more flexibility and access to their retirement savings during these challenging times.

One significant change under the CARES Act is the temporary waiver of required minimum distributions (RMDs) for 2020. This means that individuals who are normally required to take a minimum distribution from their retirement accounts, such as 401(k)s and IRAs, are not required to do so this year. This can provide valuable relief to retirees and older individuals who may have seen a decrease in the value of their retirement accounts due to market volatility.

Additionally, the CARES Act allows for penalty-free withdrawals from retirement accounts for individuals affected by COVID-19. This provision applies to individuals who have been diagnosed with the virus, as well as those who have experienced adverse financial consequences as a result of the pandemic, such as job loss or reduced income. Under this provision, individuals can withdraw up to $100,000 from their retirement accounts without incurring the usual 10% early withdrawal penalty. Furthermore, the distribution can be included in taxable income over a three-year period, and individuals have the option to repay the distribution to their plan or IRA within three years, effectively undoing the tax consequences of the distribution.

Another key provision of the CARES Act is the increase in the maximum loan amount from retirement plans. Individuals who have been affected by COVID-19 can take loans of up to $100,000 or 100% of their vested account balance, whichever is less, from their workplace retirement plans. This is an increase from the usual limit of $50,000 or 50% of the vested balance. Additionally, the act provides an extension for repayment of existing plan loans, giving individuals an extra year to repay their outstanding loan balances.

These provisions offer much-needed flexibility for individuals who may be facing financial hardship as a result of the pandemic. However, it’s important to carefully consider the long-term implications of tapping into retirement savings, as it can negatively impact the growth of those savings and future retirement security.

In conclusion, the CARES Act includes important provisions aimed at providing relief to individuals with retirement accounts during the COVID-19 crisis. These provisions offer greater flexibility and access to retirement savings, but individuals should carefully weigh the potential long-term impacts of tapping into these funds. As always, it’s advisable to consult a financial advisor or tax professional before making any significant decisions regarding retirement savings.