CARES Act loosens rules for retirement accounts

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 04/09/20


The CARES Act (Coronavirus Aid, Relief, and Economic Security), which became law on March 27, provides emergency assistance and health-care response for individuals, families, and businesses affected by the coronavirus pandemic. Among the many provisions are modifications of the rules involving retirement accounts to help both retirement savers and retirees.

One element of the bill allows retirement savers with current liquidity needs the flexibility to tap into a portion of their retirement savings if needed. Considering the fall in investment asset values, retired individuals have the flexibility to avoid required minimum distributions (RMDs) for 2020 if desired.

Here are the highlights of the impact of the CARES Act on retirement accounts.

Waiver of required minimum distributions (RMDs)

Applies to owners of IRAs and retirement accounts, as well as beneficiaries who have inherited an account. The waiver includes RMDs for calendar year 2020. Account owners who have already taken a distribution for 2020 may be able to roll the distributed amount back into the account if the distribution occurred within the last 60 days.

Penalty-free retirement distributions

The 10% early withdrawal penalty is waived for distributions up to $100,000 in 2020 for these circumstances:*

  • Diagnosed with the coronavirus
  • Spouses or dependents diagnosed with the coronavirus
  • Those who have experienced 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, or closing or reducing hours of a business owned or operated by the individual due to COVID-19
Income attributed to the distributions is taxed equally over the next three years or may be contributed back into a retirement account within three years, without regard to that year’s cap on retirement contributions. Mandatory withholding is waived for distributions from qualified retirement plans.

*Multiple distributions can be taken over 2020 as long as total does not exceed $100,000.

Expansion of retirement plan loans

For 2020, the maximum loan from a qualified retirement plan increases from $50,000 to $100,000. The loan amount may equal the full vested value of the account (rather than be limited to 50% of vested value). For those with existing, outstanding loans, certain retirement plans may limit the number of loans outstanding at any one time. The loan must be made within 180 days following enactment of the new law (March 27, 2020). New and existing retirement plan loan payments can be delayed for one year.

Additional relief: Deadline for IRA contributions extended

In addition to these legislative changes through the CARES Act, the Treasury Department announced that the filing deadline for 2019 tax returns is delayed 90 days — to July 15. Due to the change in the tax-filing deadline, IRA contributions for 2019 can be made up to July 15, 2020. For those who are looking to capitalize on market declines,  consider doubling-up and making an IRA contribution for 2019 and 2020 at the same time.

Considerations for retirement plan sponsors

  • During this time, it is especially important to maintain fiduciary obligations as a plan sponsor in terms of monitoring the plan and its investments
  • Plan sponsors will need to work with their ERISA legal counsel to determine how plan documents have to be amended to account for new CARES Act changes (for example, expanded loan provisions)
  • Sponsors should communicate related CARES Act provisions, such as new coronavirus penalty-free distributions, to plan participants
  • Due to the related economic downturn, sponsors should consult with ERISA legal counsel if considering taking actions such as suspending employer-matching contributions or terminating the plan
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