CARES Act Changes Rules for Qualified Retirement Plans, Suspends Required Minimum Distributions for 2020

The Coronavirus Aid, Relief and Economic Stimulus (CARES) Act which was enacted last week provides retirement savings tax relief and new access to retirement benefits.

Requirement Minimum Distributions

Generally, a required minimum distribution (RMD) is made annually from qualified employer retirement plans and from IRAs to individuals who have attained the age 72 and to beneficiaries following the death of a plan participant or the death of the owner of an IRA.

The CARES Act waives the requirement that RMDs be made from IRAs and qualified employer retirement plans in 2020. 

COVID-19 Related Distributions

Generally, a 10% early withdrawal penalty is assessed against individuals who take distributions from their qualified retirement account prior to age 59½.  The CARES Act creates a new exception to the early distribution penalty by allowing individuals who are either (i) infected by the virus; (ii) have a family member infected by the virus; or (iii) otherwise incur adverse economic consequences as a result of the pandemic to withdraw up to $100,000 from their qualified retirement account in 2020 without imposition of the 10% early withdrawal penalty.

No early withdrawal penalty will be assessed against a COVID-19 related distribution.  However, the distribution will still be subject to ordinary income tax.  Unless a taxpayer elects otherwise, a COVID-19 related distribution will be includible in the recipient’s income ratably in 2020, 2021 and 2022.

Finally, if an individual takes a COVID-19 related distribution, the individual will have the option of repaying the distribution to an eligible retirement plan at any time during the 3-years beginning on the date the distribution was received. 

Relaxation of Rules Related to Participant Loans

Plan participants may borrow up to the lesser of $50,000 or 50% of their vested qualified retirement plan benefits.  Loans in excess of this amount are treated as taxable distributions.  The CARES Act increases these limits for plan loans to the lesser of $100,000 or 100% of the participant’s vested plan benefits.