This article is the fourth and final installment of a four part series covering the relief provisions provide under the CARES Act, which was enacted by the federal government in response to the negative economic impact COVID-19 has had on America and its citizens.
Each part of this series will cover relief provisions in the CARES Act and how to take advantage of them by the following topics:
- Part 1: Tax Due Date Relief
- Part 2: PPP Loan, EIDL Advance, and the Stimulus Check
- Part 3: Tax Relief for Businesses, Professionals, Investors, and Individuals Alike
- Part 4: Utilization of Retirement Plan Funds and Extended Contribution Dates
This fourth installment of our CARES Act relief review will cover the relief provided for retirement plans, how to utilize such funds without the imposition of normal earl withdrawal penalties, and the extended due dates to make contributions to your retirement plan for the 2019 tax year.
COVID-19 Relief on Retirement Plans: As part of the CARES act, the federal government acted to relieve certain penalties related to early withdrawals from retirement plans and extended the time to make contributions to a retirement plan.
Why This is Important: These provisions have the effect of freeing up capital for individuals who would otherwise be required to keep them in their retirement funds or would otherwise plan to contribute such money to their retirement funds.
Below are the major changes to these provisions—
- Extension of retirement plan contribution dates
- Abatement of 10% early withdrawal penalty from retirement plans
- Suspension of minimum distribution rules
- Allowance of loans from retirement plans
Extension of Retirement Plan Contribution Dates
Extension of Due Dates: The date to make retirement plan contributions related to your 2019 tax year has been pushed back to July 15, 2020 for the following—
- HSA and Archer MSA plans;
- IRAs (Traditional and Roth)
- 401(k) Plans (Traditional and Roth)
- And all other retirement plan contributions that would otherwise be required to be made between April 1, 2020 and July 15, 2020.
Applies to Both Employee and Employer Contributions: Please note that this relief includes contributions to retirement plans from both the employee and employer
Abatement of 10% Early Withdrawal Penalty from Retirement Plans
Early Withdrawal Relief: Coronavirus-related distributions from eligible retirement plans are NOT subject to the 10% penalty on early distributions
COVID-19 Impact Requirement: All such distributions must be made on or after January 1, 2020 and before December 31, 2020 to an individual who—
- Is diagnosed with COVID-19, or whose spouse or dependent is so diagnosed; or
- Who experiences financial hardship because of quarantine in addition to other factors.
Distribution Cap: Please note that COVID-19 related distributions CANNOT exceed $100,000 for any year
- Also note that you can avoid recognizing income by repaying the distribution to the retirement plan within 3-years of receipt.
- Additionally, any income related to the distribution must still be recognized, however, you can elect to do this over a 3-year period beginning in 2020.
Suspension of Minimum Distribution Rules
Minimum Distribution Suspension: The required minimum distribution rules for IRAs and other certain defined contribution plans are waived for 2020
This waiver does not apply to any required distributions beginning in 2021 or thereafter
Plan Amendments: Note that plan amendments to comply with this provision must be made no later than the last day of the first plan year beginning on or after January 1, 2022
- Plans operated in accordance with this relief during this period in time will not fail to qualify for tax-favorable treatment.
Allowance of Loans From Retirement Plans
Retirement Plan Loan Increase: Generally, loans from qualified employer plans are only allowed to the plan’s beneficiaries up to $50,000. This limitation has been increased to $100,000 and is permitted within 180 days of the CARES Act enactment, March 27, 2020.
If you already had an outstanding loan from your qualifying retirement plan, the repayment date that falls between March 27, 2020 and December 31, 2020 has been pushed back for a full year.
A retirement plan will not be disqualified as a result of plan amendments in accordance with the CARES Act relief provisions.