CARES Act Provides Relief With Respect to Taxpayers’ Retirement Assets

March 27, 2020Alerts

The recently passed CARES Act includes various provisions which may afford financial relief to individuals with respect to their IRAs and retirement plan accumulations. The specifics of these provisions and how they will be implemented are yet to be determined through regulations and other guidance from the IRS.

Suspension of 10% Penalty on Pre-Age 59 ½ Withdrawals 

Ordinarily, Code Section 72(t) imposes a 10% penalty on withdrawals from an IRA or qualified retirement plan prior to age 59 ½. The Act permits certain distributions to “qualified individuals” of up to $100,000 from eligible retirement plans (includes 401(k)s, profit-sharing plans and IRAs) without incurring the 10% penalty. The distribution must qualify as a “coronavirus-related distribution,” which is a distribution made:

  • On or after January 1, 2020 and before December 31, 2020
  • To a “qualified individual”, defined as an individual:
    • Who is diagnosed with SARS-CoV-2 or COVID-19;
    • Whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19; or
    • Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease.

Deferred Income Taxation on a Coronavirus-Related Distribution

A coronavirus-related distribution is free of the 10% penalty but is still subject to income tax. However, the income tax attributable to a coronavirus-related distribution is to be recognized by the taxpayer ratably over the years 2020, 2021, and 2022 (therefore payable in 2021, 2022 and 2023). Alternatively, a taxpayer may elect to include the entire distribution in his/her 2020 taxable income. 

Avoidance of Income Tax Repayment of the Coronavirus-Related Distribution

A taxpayer may re-contribute an amount up to the coronavirus-related distribution taken to a qualified retirement plan within three (3) years of receiving the distribution. Redeposits of coronavirus-related distributions are to be treated in the same manner as rollover contributions.

Suspension of Plan Loan Repayment Obligations

Special relief is provided to retirement plan participants who are “qualified individuals” under the “corona virus-related distribution” rules and have outstanding plan loans. Under the Act, the due date of any plan loan payment that otherwise would be due between the date of enactment and Dec. 31, 2020, is delayed for one year. When payments resume, they will be adjusted for the interest that has accrued.

Suspension of Required Minimum Distributions

The minimum distribution requirements which otherwise would apply for calendar year 2020 are suspended. This suspension applies to distributions which otherwise would be required from IRAs, as well as from employer-sponsored defined contribution plans (profit sharing, 401(k), and individual account pension plans), tax sheltered 403(a) and 403(b) annuity plans, and eligible deferred compensation plans under Internal Revenue Code Section 457(b) (excluding those maintained by tax-exempt entities). Required minimum distributions from defined benefit pension plans are not affected.