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How did the CARES Act Impact Your Retirement Account?

Nearly three months have gone by since the World Health Organization declared a global pandemic from the rapid and rising spread of COVID-19. The world continues to navigate through these unprecedented times, the government continues to search for and provide relief to economies, and households continue to find ways to remain physically and financially secure.

The most significant avenue of financial assistance to citizens and businesses across America came from the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress on March 27, 2020. As part of the CARES Act, Section 2103, provisions were enacted to make it easier for qualified retirement plan participants to access funds during this time of financial uncertainty. Although the CARES Act does not require employers to enact these provisions within their own retirement plans until the end of 2022, it is anticipated that many will before that time. Be sure to check with your Plan Sponsor for what options are available to you.

The special provisions allow for:

  • “Coronavirus-related distributions” up to $100,000 without the 10% early-withdrawal penalty and flexibility for paying the mandatory 20% federal tax withholding.

  • Extension for redepositing “coronavirus-related distributions” to avoid taxes from sixty days to three years.

  • For retirement plans allowing loans, the legal loan limit was increased from 50% to 100% of the participant’s vested balance or from $50,000 to $100,000, whichever is less. This increase is in effect for loans taken out during the six-month period March 27, 2020 to September 23, 2020.

So, what qualifies as a “coronavirus-related distribution?” The participant must have experienced one or more of the following:

  • The participant has been diagnosed with COVID-19.

  • The participant has a spouse or dependent who has been diagnosed with COVID-19.

  • The participant has experienced a layoff, furlough, reduction in hours, or another inability to work due to COVID-19.

  • The participant has experienced a lack of childcare due to COVID-19, causing the inability to work.

Plan sponsors are required to obtain support and documentation that proves the participant is eligible to take advantage of the CARES Act provisions. Without meeting one of the criteria above, standard rules continue to apply.

These distribution and loan relief options that the CARES Act has made temporarily available to those harshly effected by COVID-19 can be greatly beneficial. With all that said, just because a participant may be eligible for one of these relief options does not mean he or she should immediately act without considering adverse effects. It is also important to consider various reasons for exhausting other alternatives before deciding to borrow on or remove funds from your retirement account. Below are some considerations to keep in mind:

  • Perhaps the most obvious reason, the more money taken out now, the less money left over for retirement, as well as missing out on the respective long-term growth.

  • It is no secret that the value of stocks and other investments have been extremely volatile during the pandemic. Selling investments in a hurting economy can lead to a loss of substantial potential earnings on investments had those funds remained in the plan.

  • Taxes. Always be aware of the potential tax effects of withdrawing from a retirement account before retirement age.

  • Job loss, voluntary or involuntary, occurring subsequent to taking out a loan against your retirement account can lead to an unintentional taxable distribution. Under most plans, loans must be repaid, following a termination, by the day your federal tax return is due for that calendar year. If not repaid within the appropriate timeframe, it will be considered a taxable distribution. Especially during financial uncertainty caused by COVID-19, this could be an extreme consequence.

These types of transactions are never easy and do not go without special considerations. To ensure your decision is most beneficial for your specific situation, be sure to consult with your trusted CPA or financial advisor!

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