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By Gregg D. Stephenson

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a massive stimulus bill designed to help both individuals and businesses survive the current economic crisis due to the coronavirus pandemic. 

Included among the many provisions are rules easing the ability of individuals to access their tax-deferred retirement accounts, such as IRAs and 401(k)s.  For many Americans, as their income falls, their retirement accounts may be their sole remaining source of cash to provide temporary financial relief needed to pay basic expenses.  However, the strict withdrawal rules usually limit the ability an individual has to access his or her retirement account. 

Under the CARES Act, President Trump and the Congress provided eligible individuals with two methods to access retirement accounts during the pandemic: hardship withdrawals and loans.  For 401(k) plans and other qualified plans, these alternatives are available only if the employer sponsoring the plan affirmative adopts these provisions as part of the plan.  In addition, for Americans who can afford to leave assets in their retirement accounts, the CARES Act provides them with some relief as well by waiving required minimum distributions for 2020.

HARDSHIP WITHDRAWAL

Qualifying Withdrawal.  First, if adopted by the employer sponsoring the plan, the CARES Act allows an individual to make a hardship withdrawal at any time during 2020 if the individual (a “Qualifying Individual”) (i) is diagnosed with COVID-19, (ii) has a spouse or dependent who is diagnosed with COVID-19, or (iii) experiences a financial hardship as a result of the disease (such as being quarantined, laid off, or having a reduction in hours and/or pay).  A Qualifying Individual can withdraw up to $100,000 penalty free, even if they are under age 59½ (typically any distribution to an individual under age 59½ would incur a 10% penalty in addition to any income tax owed).  The amount to be withdrawn must equal the amount of the hardship incurred due to COVID-19.  However, whether an individual qualifies for a hardship withdrawal, and whether the amount of the withdrawal equals the amount of the hardship, will be based on the individual’s own self-certification that he or she has met the qualifications and that the amount is appropriate.  The plan administrator may rely on the self-certification in allowing the withdrawal.

Taxable Income.  While the penalty is waived, income taxes will still be due on the distribution unless it is repaid as discussed below.  The taxable income attributable to the withdrawal will be allocated to the individual’s taxable income equally over three years rather than all in the year of distribution.  For example, if an individual takes a hardship withdrawal of $75,000 in 2020 due to COVID-19, then such individual will incur $25,000 of taxable income in each of 2020, 2021, and 2022.  The individual may elect to have all of the income included in taxable income in the year of distribution (2020) if so desired.  If an individual is confident that his or her income will be significantly lower in 2020 due to the pandemic, but will increase in 2021 and 2022, the individual may want to consider including the entire distribution in taxable income in 2020.

Repayment of Hardship Withdrawal.  While a hardship withdrawal is just that, and not a loan, the CARES Act does allow an individual to pay back into the plan or IRA part or all of the hardship withdrawal, if the amount is repaid within three years of the distribution.  Any such repayment will not be taken into account for purposes of calculating that year’s limit on contributions. 

LOANS

In addition to hardship withdrawals, if adopted by the employer sponsoring the plan, the CARES Act allows a Qualifying Individual to take additional loans out of a 401(k) or other qualified retirement account (but not an IRA).  Typically, if allowed by the employer‘s plan, an employee can borrow the greater of (i) $50,000 or (ii) 50% of the account balance out of a 401(k) account.  Under the CARES Act, the limit is increased to the greater of (i) $100,000 or (ii) 100% of the account balance.  In addition, the due date for a participant loan repayment that occurs during the period beginning March 27, 2020 and ending December 31, 2020 shall be delayed for one year, providing the individual additional time to recover financially. 

WAIVER OF REQUIRED MINIMUM DISTRIBUTION

The CARES Act also provides relief to individuals who are required to take annual distributions.  The CARES Act waives any required minimum distributions for 2020.  In this way, an individual can maintain his or her entire balance in the individual’s retirement account in 2020 in the hopes that as the market rebounds, the account will be able to recover. If an individual has already taken part of the 2020 required minimum distribution, the individual might be able to pay it back if desired under the CARES Act, but we are awaiting additional guidance from the IRS on this issue. 

FUNDING RELIEF FOR DEFINED BENEFIT PENSION PLANS

Any required minimum contributions for a single employer defined benefit pension plan are due during the 2020 calendar year and are not required to be made until January 1, 2021, with accrued interest from the original payment due date to the actual payment date. 

PLAN AMENDMENTS

As a final note, in order for employees to take advantage of the provisions of the CARES Act regarding retirement accounts, employers will need to update their plans accordingly. Employers generally have until the end of 2022 to amend their plan documents. 

If you have any questions about how the CARES Act applies to you and your retirement account, please contact one of our attorneys Gregg Stephenson, John Madsen or Kelly Applegate.


gregg d. stephenson


Gregg D. Stephenson is an experienced tax, trust and estate attorney and is monitoring related legal updates for the COVID-19 pandemic. He assists clients in designing comprehensive estate plans that help achieve their family goals in a tax efficient manner. Gregg also assists clients with trust and estate administration.

(801) 323-3368