3 Ways the CARES Act Affects Retirement Planning

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. Among its provisions, the Act includes changes that will impact retirees’ retirement income strategies.

The recent CARES Act aims to help Americans cope with the unprecedented financial fallout from the COVID-19 outbreak. Here, CKS Summit Group takes a closer look at the retirement-related provisions and how they can help you manage the financial stresses stemming from the crisis.

Who Qualifies?

Many of the key changes impacting retirement plans apply to a “qualified individual.” A qualified individual meets any one of the following tests:

The participant has a positive coronavirus diagnosis
The participant’s spouse or dependent has been diagnosed with the virus
The participant experiences adverse financial consequences from the impact of the virus because of one of the following:
- The participant was laid off, furloughed, quarantined or had hours reduced
- The participant was unable to work due to the unavailability of childcare
- The participant’s own business has had to close or reduce hours

A plan administrator may rely on the participant’s certification that they satisfy the conditions of a qualified individual and do not need to obtain additional documentation to support the determination.

1. Required Minimum Distributions (RMDs)

Perhaps the biggest retirement-related change the CARES Act made was suspending all required minimum distributions (RMDs) from retirement accounts for 2020. These accounts include 401(k)s, inherited retirement accounts, 403(b)s and 457(b)s.

Individuals must take their first RMD by April 1 of the year following the year in which they turn age 72 (or age 70 ½ for those who turned 70 ½ before Jan. 1, 2020). The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) increased the age at which RMDs must begin from age 70 ½ to 72. Participants (other than individuals who own 5% or more of a company) in employer-sponsored plans who are still working past the age of 72 may delay their distributions until they stop working.

If a participant or IRA owner has already taken an RMD for 2020, they are permitted to roll that amount to an IRA or other qualified plan to defer taxation. Currently, the rollover must be completed within the 60-day period following the distribution.

Furthermore, the RMD waiver also applies to beneficiaries and will not count against the statutory five-year required distribution period for inherited IRAs and the required 10-year period for defined contribution plans under the SECURE Act.

2. Early Retirement Withdrawals

Previously for retirement plan savers, it’s extremely tough to get at your money early: To withdraw it before age 59.5, you’ll face issues like extra penalties and steep tax withholding.

But now, with the Covid-19 crisis, it has become much easier – at least temporarily…

The CARES Act from Congress eliminated the 10% early-withdrawal hit, and 20% federal tax withholding, on early 401(k) withdrawals for those impacted by the crisis. While you will owe taxes on that sum, since the original contributions were pre-tax, that amount can be spread over 3 years. Usually, it’s due in same year in which you make the withdrawal.

Among its many retirement plan provisions, for individuals (employees, their spouses, and their dependents) who have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or who have otherwise lost income (including because of having to be home to provide child care), the CARES Act offers the following benefits with respect to early withdrawals:

The 10% penalty is waived for distributions up to $100,000 or the retirement account’s balance.
The withdrawal can be from an IRA, in addition to defined contribution plans, such as 401(k)s; and
The amounts of the COVID-19 withdrawals can be repaid to the employee’s qualified plan or retirement account (e.g., IRA, SEP, and/or Simple IRA) and, to the extent such repayment occurs within three years, the amounts repaid will not be subject to tax (until, of course, withdrawals are again made in the normal course).

3. Retirement Plan Loans

Some workplace retirement plans, such as 401(k)s and 403(b)s, permit you to take loans. Typically, you can borrow 50% of your vested account balance up to $50,000 and repay it with interest over five years.

For retirement plans that allow loans, the CARES Act doubles this limit to 100% of your vested balance in the plan up to $100,000. It applies to loans you take from your account within 180 days of the law, or until late September 2020, for Coronavirus-related financial needs.

Furthermore, upon the request of a qualified individual, any existing loan payment due on any outstanding loan between March 27, 2020, and December 31, 2020, may be delayed up to one year. The five-year repayment period is also extended for one year. Interest accrues on the loan during the delay period. Loans will need to be re-amortized to reflect the interest accrual and the change in the repayment period.

Conclusion

There’s a lot to consider when it comes to the CARES Act, so a careful review of your retirement plan’s provisions, policies, and procedures should be conducted to determine if any additional changes are needed.

Have more COVID-19 or CARES Act concerns? CKS Summit Group are here to help you navigate the uncertainty of the COVID-19 pandemic and its impact on you, your finances and your retirement plans.