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
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,
- 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
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
- Payments can be delayed for up to one year. Loan
term will also increase by one year and any applicable interest will still
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.