What's New? CARES Act Pension Account Relief

IRA Contribution Deadline Extended. The CARES Act has extended the due date for filing Federal income tax returns and making Federal income tax payments from April 15, 2020 to July 15, 2020. Contributions made between April 15, 2020 and July 15, 2020 must be designated as either previous tax year (2019) or current tax year (2020) contributions. It is likely that the extension of the IRA contribution deadline will create 5498 reporting changes. See IRA Contribution Deadlines in The Gold Book.

Required Minimum Distributions (RMDs) Suspended for 2020. The new required beginning date to take RMDs for an IRA, SEP IRA, SIMPLE IRA or retirement plan such as a 401(k) is April 1 of the calendar year following the calendar year in which the individual attains age 72. Now, because of the CARES Act, RMD payments for 2020 are waived, including those for inherited IRAs. Additionally, this covers the first RMD. So an owner who turned 70 1/2 in 2019 and didn’t take the first year’s RMD, can now wait until 2021 to satisfy the requirement. Read more about Mandatory Distributions in The Gold Book.

Qualified Coronavirus-Related Distributions (QCDs). The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows eligible participants to take penalty-free withdrawals of up to $100,000 between January 1, 2020 and December 31, 2020 for those who meet certain criteria related to the coronavirus (COVID-19). A qualified individual may take coronavirus-related distributions from multiple sources, such as both a qualified retirement plan and an IRA, but the total amount of distributions eligible for favorable tax treatment is limited to $100,000.

QCDs include adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced; being unable to work due to a lack of child care as a result of COVID-19; or closing or reducing hours of a business owned or operated by the individual due to COVID-19.

CARES Act Distributions are more favorable than hardship withdrawals—including those for Federal Emergency Management Agency (FEMA)-declared disasters—because:

• •              Income tax on the distribution may be paid over a three-year period;
• •              Participants will have the ability to repay the amount withdrawn to an eligible retirement plan within three years;
• •              Repayments will not be subject to the retirement plan contribution limits;
• •              Eliminates the 10% “early distribution” penalty that generally applies to distributions from retirement plans and IRAs before age 59½; and
• •             

More is found in The Gold Book under Penalty Exceptions.

Plan Amendments. Plan sponsors may begin operating their plans in accordance with the CARES Act immediately.  Plan sponsors will generally have until the end of the first plan year beginning on or after January 1, 2022 to amend their plans. It lets people make early withdrawals from retirement accounts without paying the typical 10% penalty. Learn more about Plan Amendments here.

Pension Loan Provisions and Repayment Requirements. For retirement plan loans to qualified individuals made between March 27, 2020 and September 23, 2020, the CARES Act:

-       Increases the maximum loan amount from $50,000 to $100,000; and

-       Allows participants to take the full amount of their vested benefit as a loan, rather than limiting the loan amount to 50% of their vested balance.

The CARES Act also delays the due date for loan repayments for qualified individuals that are due between March 27, 2020 and December 31, 2020 for 1 year, and extends the maximum 5-year repayment period accordingly. See Plan Loans Under the CARES Act.

Safe Harbor Hardship Withdrawals. Under regulations issued in September 2019, a new safe harbor was created for hardship withdrawals due to a Federal Emergency Management Agency (FEMA)-declared major disaster. Accordingly, if FEMA declares a major disaster in a state as a result of COVID-19, a safe harbor hardship withdrawal would be available for 401(k) or 403(b) plans to cover a participant’s expenses and losses (including loss of income)—provided that their home or workplace is located in an area designated by FEMA for individual assistance.