BSB | Retirement Planning Changes

The Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided many types of relief during the COVID-19 pandemic. One of the areas it has addressed is retirement plans. Not only has the CARES Act provided greater flexibility and access to retirement assets, it has also created changes to the way plans are managed. Recently released IRS guidance expands on CARES Act changes and provides further clarification for individuals, employers, and eligible plans.  

Here are some of the changes that may affect retirement planning and distributions. This is not a complete list of all the new rules, but will give you a starting point for planning.

Special Tax Exceptions for Coronavirus-Related Distributions

The CARES Act provides special tax treatment for coronavirus-related distributions (CRDs) from a retirement plan for qualified individuals.

  • Distributions subject to the special treatment must be made from eligible retirement plans between January 1, 2020 and December 31, 2020.
  • CRD exceptions are limited to $100,000 total distributions from all qualified plans by qualified individuals.
  • The 10% penalty that is usually assessed for early distributions from IRAs or other qualified plans is waived for CRDs.
  • Early distributions can be included in taxable income over a three-year period.
  • Instead of being treated as taxable income, distributions can be treated as direct rollovers to an eligible retirement plan as long as the distributions are recontributed to eligible plans within the allocated three-year period after the distribution was received.
Changes to Qualified Individuals

To be eligible for the CARES Act exemption, an individual must be qualified, which means they must meet the following requirements:

  • The individual, spouse, or dependent has been diagnosed with COVID-19.
  • The individual has experienced financial hardship resulting from COVID-19, including layoff or furlough, reduced work hours due to lack of childcare, or reduced hours due to a business closing or reducing hours.
Changes to Retirement Plan Loans

There are also some changes to retirement plan loans taken between March 27 and December 1, 2020.

  • Retirement plan loans typically limited to $50,000 or 50% of vested balance have been increased to a limit of $100,000 or 100% of vested balance.
  • Payments can be delayed for up to one year. Loan term will also increase by one year and any applicable interest will still accrue.
Changes for Employers

There are some implications for employers or plan distributors.

  • The new guidance does not change the rules for when plan distributions are permitted to be made from employer retirement plans. 
  • Plans are not required to offer direct rollovers to qualified individuals. 
  • Under typical circumstances, plan administrators are required to withhold an amount equal to 20% of the distribution, but the withholding will not be required for CRDs.
  • Employers may choose when to treat distributions as CRDs regarding changes to loan provisions or repayment schedules. Regardless of the procedures used to identify CRDs, plans must be consistent with similar distributions.
  • The $100,000 CRD limit must be taken into consideration in distributions.
  • For distributions that are not treated as CRDs by employers, qualified individuals can still treat distributions that meet the requirements as CRDs for income tax purposes.

These are just a few of the changes that have resulted from the CARES Act. If you have questions about your specific situation, please contact the professionals at BSB. We will help you address and plan for any changes that may impact you or your business.