The Coronavirus Aid, Relief, and Economic Security ("CARES") Act is geared towards providing relief for businesses, but it also contains provisions that change some of the rules for retirement plans.
Here are some of the highlights:
The Act waives the 72(t) 10% early distribution penalty for "coronavirus-related" distributions made any time in 2020 that would apply to most distributions made before turning age 59 ½. Qualifying individuals can withdraw up to $100,000 from an IRA as well as employer workplace plans including 401(k), 403(b) and governmental 457(b) plans.
Withdrawals would still be subject to taxation; however, a qualifying individual would have the option to pay the income tax due over three years. The distributed amounts can also be repaid to a qualified plan or an IRA over the next three years. Repayment can be made via a single rollover or multiple rollovers as long as it's made during the allotted three-year time frame (2020-2022).
The Act increases the plan loan amounts to the lesser of $100,000 or 100% of the participants vested account balance. A qualifying loan applies to loans taken within 180 days of the enactment of the bill. Individuals with a current plan loan with a repayment due from the date of enactment (3/27) through December 31st, 2020, can delay their loan repayment for up to one year.
Waiver of Required Minimum Distributions
With the exception of defined benefit plans, required minimum distributions (RMDs) are waived for all employer plans and IRAs in 2020, including inherited accounts. This provision also applies to RMDs due in 2020, but attributable to 2019. Individuals do not need to meet COVID-19 qualifying criteria to waive RMDs for 2020.
Other Related Developments
The Act provides for payments to taxpayers in the form of a $1,200 refundable tax credit for individuals and $2,400 for joint taxpayers. Additionally, taxpayers with children will receive a flat $500 for each child. These rebates are not considered taxable income but rather a credit against tax liability. The rebate starts to phase out $75,000 for individuals, $112,500 for heads of household and $150,000 for joint taxpayers.
We recommend that you contact your tax advisor with any income tax related questions.