In response to the coronavirus pandemic, both Michigan and the federal government have introduced measures intended to help individuals, families, and businesses in the state. Although stimulus checks and SBA loans offer some assistance, Congress is now allowing people to tap their retirement savings to weather the economic hardship of the COVID-19 crisis.
Options Under the CARES Act
The recently adopted Coronavirus Aid, Relief and Economic Security (CARES) Act created special rules for taking withdrawals and making loans from retirement plan funds, such as 401K, 403(a), 403(b) and government-sponsored 457(b) plans.
There are several modifications to these retirement plans that impact participants and employees. We explain the three most important changes below.
Through December 31, 2020, the CARES Act allows in-service distributions up to $100,000 for coronavirus-related reasons. These distributions are not subject to the 10 percent early distribution penalty that usually applies to distributions made before age 59-1/2.
The distributions may be repaid, in one or more contributions, within three years. Also, income taxes may be paid pro-rata over three years.
A coronavirus-related in-service distribution may be made to an individual:
- Who is diagnosed with COVID-19;
- Whose spouse or dependent is diagnosed with COVID-19;
- Who experiences adverse financial consequences because of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of childcare, closing or reduced hours of a business owned and operated by the individual; or
- Other factors determined by the Secretary of the Treasury.
The plan administrator may rely on an employee’s certification that they satisfy the eligibility requirements in determining whether any distribution is related to the coronavirus.
Before the pandemic, participants could loan themselves funds from their retirement plans. The CARES Act temporarily raises the maximum loan limit and temporarily extends the repayment period for any plan loan, whether or not it is coronavirus-related.
For six months, the maximum permissible loan has been temporarily increased to the lesser of:
- $100,000 (previously $50,000) reduced by the amount of any outstanding loan; or
- The participant’s account balance (versus the current 50% of the participant’s account balance).
For each outstanding loan repayment due by December 31, 2020, the repayment date is delayed for one year, even if the delay results in a loan repayment after the end of the statutory five-year loan repayment period. The existing loan repayment schedule, however, must be adjusted to reflect the delay, and interest will continue to accrue from the date the payment was originally due through the actual repayment date.
Waiver of Required Minimum Distributions for 2020
Under the CARES Act, the required minimum distribution (RMD) mandates for calendar year 2020 are waived.
This waiver applies to anyone with an RMD due in 2020, including those who turned age 70-1/2 in 2019 and owed an RMD by April 1, 2020. A participant may still, however, elect to take a distribution. Also, the RMD waiver for 2020 does not affect the effective date of the SECURE Act’s change in the age at which RMDs must begin; under that Act, the age increased from 70-1/2 to age 72 for individuals who had not reached age 70-1/2 by December 31, 2019.
Talk to a Kreis Enderle Attorney
COVID-19 has turned our world upside down, and for many, it threatens to turn their wallets inside out. If you have questions about if and how to take coronavirus-related withdrawal or loan from a retirement plan, we can help. Our office is closed, but we are working remotely so we can continue to serve our valued clients. Contact us today.