In response to the COVID-19 outbreak, Congress passed, and President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition to providing economic relief to employers and employees, it also contains temporary provisions that effect Qualified Plans and Individual Retirement Accounts (IRAs). The main areas that the CARES Act changes requirements for Qualified Plans and IRAs are Required Minimum Distributions (RMDs), Hardship Withdrawals, and Loans.
- Required Minimum Distribution Waiver – Normally, once a plan participant or account owner of a Qualified Plan, such as 401(k), 403(a), 403(b), 457(b), 401(a), profit share plans, SIMPLE IRA, SEP IRA, or IRA, reaches age 72; he or she must withdraw or the account must distribute an amount of money from the account based on their life expectancy or be penalized. Now, the CARES Act waives this distribution requirement for the 2020 calendar year. Of course, the participant or account owner may still make the distribution if he or she desires. Distributions from traditional qualified plans will still be subject to income tax; however, if the individual repays the withdrawn amount within 60 days, the withdrawal will not be subject to federal income tax.
The CARES Act also temporarily waives required distributions for inherited IRAs. Normally, beneficiaries of inherited IRAs must withdraw all of assets of the inherited account within 10 years of the date of death of the employee, unless the beneficiary is a surviving spouse, minor child, a disabled beneficiary, a chronically ill individual, or a person who was less than 10 years younger than the employee (or the same age or older than the employee). Now, for 2020, beneficiaries of inherited IRAs are not required to make withdrawals. Beneficiaries of the inherited account are still allowed to withdraw from the accounts; and will of course be taxed on those withdrawals from traditional pre-tax plans.
It is important to note that if the account owner of an IRA account or the beneficiary of an IRA account is on certain Medicaid programs such as Nursing Home Medicaid (ICP), PACE, Long Term Care Waiver, I-Budget DD Waiver, that account owner or beneficiary may still need to take withdrawals from the IRA account in order for it to count as income and not an asset. This may include account owners and beneficiaries whose spouse is on these Medicaid programs. If you have questions about your specific IRA account and your Medicaid benefits, you should consult with an Elder Law Attorney.
- Hardship Withdrawals – Normally, if an individual makes a withdrawal of their Qualified plan before he or she has reached the age of 59 1/2, that individual can be subject to a ten percent (10%) penalty on the withdrawal amount. The CARES Act will allow certain individuals to withdrawal up to $100,000 from their 401(k), 403(b), 457(b) or IRAs during calendar year 2020 without the 10% penalty. This applies to only those qualified individuals who have been diagnosed with COVID-19; have a spouse or dependent who has been diagnosed with COVID-19; or “experience adverse financial consequences” from being quarantined, furloughed, laid off, reduction in work hours, unable to work due to lack of child care, or closing or reduction in hours of a business owned or operated by this person due to COVID-19. The individual may repay the money withdrawal back to the retirement plan within 3 years without being limited to the annual limit on contributions to Qualified plans. Also, the withdrawals are not subject to the 20% withholding for federal income taxes.
- Loans form Qualified Plans – Before, certain ERISA Qualified Plans could make loans to plan individuals of up to $50,000. The CARES Act allows plan sponsors the option to temporarily increase the limit of the loan from $50,000 to $100,000. So now qualified individuals can borrow the lesser of $100,000 or 100% of their vested account balance over a 180-day period from March 27, 2020 to September 22, 2020. If the loan is repaid in full within 3 years, there will be no federal income tax due on the amount loaned. In addition, the Act allows a delay in loan repayment dates. If a Qualified Individual has an outstanding loan on or after March 27, 2020, any loan repayment dates that had been scheduled from March 27, 2020 through December 31, 2020 may be delayed for one year.
These provisions do not apply to IRAs because IRAs are not allowed to make loans to account holders and inherited beneficiary owners.
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 Note, prior to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the age was 70 ½.