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CARES Act and Retirement Accounts

P. Kristen Bennett

By P. Kristen Bennett, Esq.

On March 27, 2020, President Trump signed into law the Coronavirus, Aid, Relief, and Economic Security (CARES) Act, which includes provisions that provide assistance to retirement plan participants and sponsors as they work through the coronavirus outbreak. The Act provides special rules if:

  • You, your spouse, or dependent has been diagnosed with COVID-19 or
  • You’ve experienced adverse financial hardship as a result of COVID-19 because of the following:
    • You’ve been quarantined, furloughed, laid off, or your work hours have been reduced
    • You’re unable to work because of child care
    • You’ve had to close or reduce the hours of a business you own or
    • You’ve been adversely impacted financially by other factors as determined by the Secretary of the Treasury

For those who fit into one of the categories above, the rules regarding retirement plans have been changed as follows:

  1. Required minimum distributions (RMDs) are suspended for 2020.  Generally, you are required by law to take withdrawals from your retirement plans, such as a 401(k) or IRA, once you reach the age of 72. The CARES Act waives these RMDs for 2020. However, a plan participant who has already taken their RMD will be responsible for the taxes and may not repay it to the plan.
  2. Early withdraw penalties are waived.  The CARES Act waives the 10 percent penalty on withdrawals if you are younger than 59 ½ years for amounts up to $100,000, if you fit into one of the above described categories. Typically, you would be responsible for the income tax on the withdrawal and the 10% penalty for an early withdrawal in the year the early distribution was taken. However, under CARES, you have three years to pay the amount back to the retirement account, or you may elect to include the amount in your income over a period of three years.
  3. Loans from retirement plans are doubled. Loan limits from a retirement plan have been increased from $50,000 to $100,000.  Additionally, the rule that loans may not exceed one half of the vested accounted balance has been removed. Plan participants taking a loan from their retirement accounts may also defer payments for up to one year. This includes payment on existing retirement plan loans or new loans. There is no penalty if plan participants continue to pay their loans on time.

These rule changes are still subject to IRS guidance, which is anticipated in the coming weeks. The IRS will clarify how the CARES Act impacts retirement plans and updates will be published on the IRS website

Gawthrop Greenwood and its team of lawyers will continue to review legislation and governmental decisions as they unfold, as we are committed to providing guidance to our clients. If you have any questions, please do not hesitate to call us at 610-696-8225

P. Kristen Bennett - Trusts & Estates Attorney

Kristen Bennett is a member of Gawthrop Greenwood’s Estates and Trusts Department, and practices in the Wilmington, Delaware office. She focuses her practice on estate planning and administration and trust administration. She also provides counsel on taxation and tax planning for businesses.

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