The Coronavirus Aid, Relief and Economic Security (CARES) Act included several important retirement account withdrawal and plan loan relief provisions to help provide financial assistance to individual investors and plan participants if they have been adversely affected by COVID-19.
Who qualifies? In order to be eligible for relief under the CARES Act you must be a qualified individual. This includes:
- Those diagnosed with COVID-19 by a test approved by the CDC
- Those whose spouse or dependent is diagnosed with COVID-19 by a test approved by the CDC
- Those who experience adverse financial consequences from: being quarantined; being furloughed, laid off or having reduced work hours; unable to work due to lack of childcare; or closing or reducing the hours of a business owned by you
What relief is available? For qualified individuals, relief comes in many forms. Relief specifically related to retirement accounts includes the following:
- Coronavirus-Related Distributions (CRDs): Up to $100,000 can be distributed from IRAs and company plans (401(K)s, 403(b)s and 457(b) plans) penalty free, regardless of age. For qualified individuals this includes any such distribution that occurs between December 31, 2019 and December 31, 2020. Any pre-tax distributions will still be taxable as income to the recipient, but they can report that income equally over three years instead of reporting it all in the initial year it was received. Recipients can avoid paying taxes on their distributions if they roll funds received back into a retirement account; they have three years from the initial distribution date to do so and the amount repaid can be any amount up to the total amount distributed. For those taking distributions from their IRAs, the 1099-R reporting the distribution will not contain any special codes; the individual will need to self-certify that they qualify for the distribution exceptions. For those looking to take a distribution from an employer plan; first, the employer must choose to amend their plan document to allow for these exceptions; second, the individual (plan participant) must be able to certify to the plan administrator that they are a qualified individual. If a plan doesn’t specifically offer CRDs, a participant could still use the plan hardship distributions if those are allowed and still qualify for the same special tax treatment if they are a qualifying individual.
- Modification to Plan Loans: If an employer plan already allows loans, the CARES Act increased the maximum loan amount for qualified individuals to the lesser of $100,000 (reduced by other outstanding loans) or 100% of the participant’s account balance. Loans must be taken by September 23,
2020 and employers are not required to amend their plans to allow for this change. This relief also provides that for qualified individuals any loan repayments that were due between March 27, 2020 and December 31, 2020 can be suspended for one year. Interest will accrue during the delay.
- 2020 RMD Waiver: Also included in the CARES Act was a waiver of required minimum distributions (RMDs) during 2020 from company plans, IRAs, and Inherited IRAs / Inherited Roth IRAs. This waiver applies to all individuals normally subject to RMDs even if they are not considered a “qualified individual” as defined previously. An individual can choose to take any portion or none of their 2020 RMD amount. Normal RMD rules will apply again starting January 1, 2021. For clients making Qualified Charitable Distributions (QCDs) from their IRAs; those are unaffected and can continue if the client is otherwise eligible to make them even though their RMD is not required. If you find yourself or a family member needing some financial relief and are considering taking advantage of one of the above law changes, please give our office a call to discuss all the options that may be available as some may be more appropriate than others for your specific situation. Waterford Advisors, LLC’s financial planners are always available to assist with any questions that you may have. Please feel free to contact our office at any time.