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Gianelli Nielsen News Blog

Wednesday, July 29, 2020

CARES Act Impact on Retirement Plans

In March 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the COVID-19 pandemic and economic crisis. The CARES Act, among other things, included numerous provisions related to retirement plans.

First, individuals who have been affected by the coronavirus pandemic may withdraw up to $100,000 from select retirement plans and IRAs without paying the standard 10% early withdrawal fee. In order to qualify,  an individual must meet one of the following conditions:

  • be diagnosed with the virus SARS CoV-2 or with the coronavirus disease at a CDC-approved testing site;
  • have a spouse or dependent diagnosed with SARS-CoV-2 or the coronavirus disease at a CDC- approved testing site; or
  • suffer financial consequences, or have a spouse or dependent suffer financial consequences, resulting from:
  1. being quarantined, furloughed, laid off, or having work hours reduced due to the coronavirus pandemic;
  2. being unable to work due to lack of child care due to the coronavirus pandemic;
  3. closing or reducing hours of a business owned by the individual; or
  4. (other factors determined by the United States Department of the Treasury.

Second, the CARES Act waives all required minimum distributions of IRAs and other defined contribution plans for 2020. This waiver provides retirees with more time to allow their accounts to recover from potential stock market downturns. In addition, the waiver grants retirees who can afford to leave their accounts alone with a tax break of not being taxed on a minimum withdrawal.

Third, the CARES Act changes how some employees may take out loans from certain retirement accounts, such as 401(k) and 403(b) plans. Normally, owners of these plans are permitted to borrow a maximum of $50,000 or 50% of the vested balance of their account, whichever is less. The CARES Act increases the limit on these loans to either a maximum of $100,000 or 100% of the vested balance, whichever is less. This increase applies to any loan taken out from March 27, 2020 to September 23, 2020. Typically, employees who take out loans from these accounts must repay within five years. However, the CARES Act allows the individual to forgo repayment in 2020 and begin the five-year repayment window in 2021. This provides employees with an additional year to repay their loan.

~ Jacob Beltrami


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