Expanded Access to Retirement Funds for Plan Participants

The Corona virus Aid, Relief, and Economic Security (CARES) Act became law on March 27. 2020. The Act contains retirement plan provisions to provide relief for participants affected by the current crisis. See below for a general summary of the highlights for Defined Contribution Plans (e.g. – 401(k) profit sharing plans, SEPS):

New Distribution Options:

  1. Provides for a new type of distribution for plan participants employed by the plan sponsor. To be eligible (a “qualified individual”), the participant, their spouse or dependent must have been diagnosed with or have suffered financial consequences due to COVID-19. A participant must certify they are a qualified individual and the plan administrator can rely on the participant’s certification.
  2. A qualified individual can request a lump sum (or multiple payments) of up to $100,000; all must occur in the 2020 plan year. The 10% early withdrawal penalty for distributions before age 59½ is removed for these payments. Distributions must be requested after January 1, 2020 and before December 31, 2020. These distributions are not eligible for rollover and are not required to have taxes withheld from them at the time of the distribution.
  3. Income tax on these distributions can be spread out over three years.
  4. The distribution can be repaid (lump sum or payments) over three years from the time of the distribution is received, but there is no requirement to repay.

Plan Loan Relief:

The CARES Act also contained additional loan provisions for qualified individuals. If the plan does not currently have loan provisions, it can be amended to allow for loans. The limit was temporarily increased from $50,000 to $100,000 and repayments can be delayed for up to one year, but interest continues to accrue during the period. To qualify for a CARES Act loan, it must be issued between March 27, 2020 and September 22, 2020.

A qualified individual may suspend current outstanding loan repayments from March 27, 2020 through December 31, 2020, but interest continues to accrue during the suspension period.

Both the distribution and the loan provisions are optional, and amendments to allow for these provisions would need to be in place by the end of 2022. While some details are still unknown, we expect that the IRS will be issuing additional guidance in the coming months.

Please contact us if you would like to discuss the CARES Act and your retirement plan.

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