Provisions of CARES Act Related to 401k and IRA Distributions

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By: Melanie E. Cuddyre, Esq.

 

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was signed into law on March 27, 2020. The CARES Act serves as a stimulus package which, among other stipulations, includes several provisions related to distributions from 401k’s and IRA’s. The CARES Act allows both penalty-free early distributions from qualified plans as well as the opportunity to forgo taking a Required Minimum Distribution for 2020.

Relevant portions of the Act are outlined as follows: 

Penalty-Free Coronavirus Related Early Distributions for 2020

Coronavirus-related distribution:

One that is made to an individual:

  1. Who is diagnosed with SARS-CoV-2 or COVID-19,
  2. Whose spouse or dependent is diagnosed with the virus, or
  3. Who experiences financial consequences as a result of quarantine, being furloughed or laid off or having reduced work hours, being unable to work due to lack of childcare, or business losing or reduced hours

Employees are required to sign a certification of the reason for the distribution. Plan administrators are not required to verify the reason.

The Act waives the 10% penalty for related distributions up to $100,000 for 2020.

A related distribution may be included in income over a three-year period.

A related distribution may be recontributed over a three-year period to the plan from which it was withdrawn or another qualified plan. A contribution shall be treated as direct trustee to trustee transfer. Contribution limits will not apply to recontribution. Recontribution avoids tax.

Increase on Amount that Can be Borrowed from Retirement Plans Which Allow for Loans

Previously, plan participant loans were limited to $50,000 or ½ of the participant’s vested account balance.

Under the CARES Act, a participant can borrow the lesser of $100,000 or 100% of the participant’s vested account balance commencing with the date of passage and lasting 180 days.

The loan must be Coronavirus-related (must meet 1 of the 3 requirements above).

For participants with currently outstanding loans, payments through December 31, 2020 can be deferred for one year.

Plan sponsors who wish to amend their plans to take advantage of this increase must amend their plan by the last day of the first plan year beginning on or after January 1, 2022.

For example, if a plan sponsor wants to add loans to its retirement plan effective April 1, 2020, the plan will need to be amended by no later than December 31, 2020, to permit that change.

Required Minimum Distributions (RMDs) Temporarily Waived

The CARES Act allows for waiver of RMDs through 2020. This applies to all individuals who are required to take RMDs – the decision not to take an RMD does not need to be coronavirus-related.

If an individual already took their 2020 RMD, they can recontribute it within 60 days of distribution. Further IRS guidance regarding other recontribution possibilities is forthcoming.

Note that this also applies to IRA beneficiaries subject to the 5-year-rule. For beneficiaries who inherited from 2015 to 2020, the 5-year-rule is now a 6-year-rule.

Leech Tishman’s Estates & Trusts Practice Group continues to monitor development and Internal Revenue Service (“IRS”) guidance. Individuals with questions regarding the CARES Act and its impact on their estate or tax planning should reach out to Leech Tishman’s Estates & Trusts team.

Melanie is an attorney in the firm’s Estates & Trusts and Taxation Practice Groups and practices in the Pittsburgh, PA and Lakewood Ranch, FL offices. She can be reached at 412.261.1600, 941.877.1830 or mcuddyre@leechtishman.com.

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