The CARES Act includes
provisions advocated by the American Retirement Association that loosen
retirement plan hardship and loan rules to free up funds for individuals
impacted by the Coronavirus pandemic.
Life (and legislation) has
been coming at us fast in March, as the country and Congress copes with the
Coronavirus pandemic. Each week this month has seen a new and escalating policy
response to the rapid spread of the virus, which has shut down major segments
of our economic and social life for the foreseeable future. This latest (and
largest) round of economic and health care stimulus is expected to come with a price
tag of well over $1 trillion.
As a first step in this
latest effort, Senate Majority Leader Mitch McConnell (R-KY), on behalf of the
Senate Republican caucus, introduced the Coronavirus, Aid, Relief, and Economic
Security (CARES) Act, which includes key provisions advocated by the American
Retirement Association affecting hardship distributions and plan loans.
Hardship Distributions
The CARES Act waives the
Code Section 72(t) additional 10% tax on early withdrawals up to $100,000 from
a retirement plan or IRA for an individual who:
1.
is
diagnosed with COVID-19;
2.
whose
spouse or dependent is diagnosed with COVID-19;
3.
who
experiences adverse financial consequences as a result of being quarantined,
furloughed, laid off, having work hours reduced, being unable to work due to
lack of child care due to COVID-19, closing or reducing hours of a business
owned or operated by the individual due to COVID-19; or
4.
other
factors as determined by the Treasury Secretary.
The CARES Act permits
those individuals to pay tax on the income from the distribution ratably over a
three-year period and allows individuals to repay that amount tax-free back
into the plan over the next three years. Those repayments would not be subject
to the retirement plan contribution limits.
Plan Loans
The CARES Act doubles the
current retirement plan loan limits to the lesser of $100,000 or 100% of the
participant’s vested account balance in the plan. Individuals with an
outstanding loan from their plan with a repayment due from the date of enactment
of the CARES Act through Dec. 31, 2020, can delay their loan repayment(s) for
up to one year.
Plan Amendments
Retirement plans can adopt
these rules immediately, even if the plan does not currently allow for hardship
distributions or loans, provided the plan is amended on or before the last day
of the first plan year beginning on or after Jan. 1, 2020, or later if
prescribed by the Treasury Secretary.
Next Steps
The CARES Act represents
the Senate Republicans’ opening negotiating position. Majority Leader McConnell
is now expected to quickly enter into negotiations with his Democratic
counterpart, Minority Leader Chuck Schumer (D-NY), to hammer out a bipartisan agreement
on a package that can pass both chambers of Congress for President Trump’s
signature.
Andrew
Remo is the American Retirement Association’s Director of Legislative Affairs.
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