Published on 05/04/20

The CARES Act: Retirement plan provisions

By Joan Koonce

Because of the negative impact of the COVID-19 crisis on America, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law to provide emergency relief to individuals and businesses.

As a result of the act, changes have been made to several retirement plan provisions.

10% Early Withdrawal Penalty

Typically, when money is withdrawn from a qualified retirement plan before age 59 1/2, a 10% early distribution penalty is assessed. If allowed by the plan, the 10% penalty that would normally be assessed on early withdrawals from a retirement plan may be waived for distributions up to $100,000 for certain situations encountered due to the COVID-19 crisis.

Penalty-free withdrawals may be made by individuals during the 2020 calendar year if he or she, his or her spouse and/or dependent have been diagnosed with COVID-19 and/or has suffered financial losses due to reduced work hours, loss of employment, etc.

Loan Limits

A qualified retirement plan may, but is not required to, provide loans to plan owners. If loans are made, there are limits to loan amounts.

Since the COVID-19 crisis began, limits on amounts that can be borrowed from employer-sponsored plans and deadlines for repayment have been expanded.

The maximum loan amount has increased to $100,000 or 100% of the plan participant’s vested account balance, whichever is less. This applies to loans made on or before Sept. 23, 2020, and may be made by an individual if he or she and/or his or her spouse or other dependents have been diagnosed with COVD-19 and/or has suffered financial losses due to reduced work hours, loss of employment, etc.

Loan repayments may be delayed for up to one year, but interest continues to accrue during this time. The retirement plan may also extend loan terms for up to one year. If loans are not repaid, the distribution will be taxable.

Required Minimum Distributions (RMDs)

Normally, when a person reaches a certain age, he or she is required to begin taking RMDs from their employer-sponsored retirement accounts and their individual retirement accounts (IRAs) the year following reaching that age.

The CARES Act has suspended RMDs from employer-sponsored retirement plans and IRAs for calendar year 2020. If RMDs already have been made, plan participants can roll the money back into the plan or roll it over to another plan without any tax consequences.

There are overall rules that govern various types of retirement plans. However, retirement plans can differ from one employer and/or sponsor to the next.

Be sure to check with your retirement plan sponsor and/or financial advisor before making a decision about withdrawals or loans from your retirement plans.

Joan Koonce is a Professor & Extension Financial Planning Specialist in the UGA College of Family and Consumer Sciences