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Coronavirus Aid, Relief and Economic Security (CARES) Act Brings Relief for Retirement Plan Participants

Written by: Christopher R. Paul

Originally published on 3/30/2020.  Re-published in NH Business Review on 7/16/2020.

Corona Virus Distribution

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 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.

Extended Deadline for 2019 Contributions to Traditional and Roth IRAs and Health Savings Accounts

In Notice 2020-2019, the Treasury Department and the Internal Revenue Service announced special Federal income tax return filing and payment relief in response to the ongoing pandemic emergency.  IRS guidance has confirmed that “because the due date for filing Federal income tax returns has been postponed to July 15, the deadline for making contributions to an IRA [and HSA accounts as well] for 2019 is also extended to July 15, 2020.”   

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