The Cares Act includes new distribution options offered in retirement plans to individuals impacted by the virus. Eligible individuals may take advantage of these temporary distribution options (1) coronavirus-related distributions and (2) coronavirus-related plan loans.
Qualifying individuals may take up to a $100,000 distribution from their qualified retirement accounts from January 01, 2020, to December 31, 2020.
Special Rules Apply to Coronavirus-Related Distributions:
- The CARES Act also waives the 10 percent early withdrawal penalty on distributions taken before a plan participant attains age 59 ½.
- Under the Act withdrawals are still subject to income tax; however, you can elect to spread the income over a three-year period beginning with the taxable year 2020. For example, if you withdraw $45,000 in 2020, you can include $15,000 of income over the tax years 2020, 2021, and 2022 (instead of 100% in 2020).
- There is no mandatory tax withholding on the distribution (though you can elect to withhold). The distribution is exempt from the 20% Federal tax withholding requirement.
- Individuals can also repay some or all of the distribution back to retirement plan within the three year period beginning on the date of distribution.
Repayment of Distributions
The distribution can be repaid to any retirement plan that accepts rollovers. The repayment can be made in one or more installments. You are not taxed on the distribution if you repay the distribution to a qualified plan. Any individual who repays a portion or the entire amount of the Coronavirus-Related Distribution before the end of the three-year repayment period may file amended tax returns to claim a refund of any taxes already paid.
Who is eligible for Coronavirus-Related Distributions?
To apply for a coronavirus-related distribution (CRD), you must certify that you meet at least one of the following qualifying conditions:
- You have been diagnosed with COVID-19 by a CDC-approved test
- Your spouse or dependent that is so diagnosed; or
- You are have experienced adverse financial consequences as a result of the virus
Adverse financial consequences can include any of the following:
- being quarantined
- being furloughed, laid off, or having work hours reduced due to coronavirus or disease
- being unable to work due to lack of child care due to coronavirus or disease
- closing or reducing hours of a business owned or operated by the individual due to coronavirus or disease, or
- other factors as determined by the Secretary of the Treasury.
Coronavirus-Related Plan Loans
The CARES Act also authorized retirement plans to make changes to the participant loan rules for qualified individuals:
- Coronavirus-related plan loans have increased limits to $100,000 and 100 percent of the present value of the employee’s vested benefits (up from $50,000/50%), for loans taken out during the 180 day period beginning on March 27, 2020.
- Additionally, the CARES Act extends due dates on loan repayments due between March 27, 2020, and December 31, 2020, repayments can be delayed for up to one year. This provision applies to new and existing loans.
Temporary Waiver of Required Minimum Distributions
Under the Cares Act payment of Required Minimum Distributions (RMDs) from qualified retirement plans and IRAs are waived for 2020. This includes individuals that are already receiving RMDs and individuals who are required to begin in 2020. A retirement plan participant or IRA owner generally is required to take RMDs beginning in the calendar year after attaining age 72 (or 70 1/2 for one who attained that age before 2020).
Individuals who have already taken their RMD for 2020, may have the option to rollover distributions. This provision allows the retirement account owner to avoid paying income tax on the RMD. There is a 60-day grace period that allows for RMDs to be “rolled over” into a new IRA. Annual withdrawals taken from February 1, 2020, to May 15, 2020, must be rolled over by July 15, 2020. Beneficiaries with inherited accounts cannot rollover distributions.