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, also known as the Coronavirus Aid, Relief, and Economic Security Act, was signed into law on March 27, 2020. Among its various provisions, the CARES Act includes measures aimed at providing relief for retirement plan participants during the ongoing COVID-19 pandemic.

One of the key provisions of the CARES Act is the expansion of coronavirus-related distributions from retirement accounts. Under this provision, individuals who have been affected by the virus in certain ways are allowed to withdraw up to $100,000 from their eligible retirement plans, including 401(k) plans and individual retirement accounts (IRAs), without incurring the usual 10% early withdrawal penalty. Additionally, these individuals have the option to spread the income tax on these withdrawals over a three-year period.

To qualify for a coronavirus-related distribution, individuals must meet one of the following criteria:

1. They, or their spouse or dependent, have been diagnosed with COVID-19.
2. They have experienced adverse financial consequences due to being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of childcare, as a result of the virus.
3. They own a business that has been closed or experienced a significant reduction in operating hours.

Another provision of the CARES Act provides relief for individuals who have outstanding loans from their retirement plans. Normally, if a participant terminates employment or retires with an outstanding loan balance, they would be required to repay the loan within a specified timeframe or face taxes and penalties. However, under the CARES Act, if a participant qualifies for a coronavirus-related distribution, the loan repayment due between March 27, 2020, and December 31, 2020, can be delayed for up to one year.

Furthermore, the CARES Act provides temporary relief for required minimum distributions (RMDs) for certain retirement accounts. Previously, individuals aged 72 or older were required to take distributions from their retirement accounts annually, based on their life expectancy. However, under the CARES Act, RMDs for the year 2020 are waived. This provision gives retirees the opportunity to keep funds invested in their accounts for potential recovery and growth once the market stabilizes.

It is important to note that while these provisions provide relief and flexibility for retirement plan participants, they should be considered carefully, as there may be long-term implications for retirement savings. Withdrawing funds from retirement accounts early can decrease the overall value of the account, potentially affecting an individual’s financial security in retirement.

In conclusion, the CARES Act includes several retirement plan provisions aimed at providing relief for individuals affected by the COVID-19 pandemic. These provisions allow for penalty-free withdrawals, delayed loan repayments, and waiver of required minimum distributions for 2020. However, it is crucial for individuals to weigh the potential long-term impact of these provisions on their retirement savings before making any decisions. It is recommended to consult with a financial advisor or retirement plan expert to fully understand the implications of these provisions on individual circumstances.