Insights + Resources

CARES Act and Coronavirus Relief

Apr 2, 2020

Law hammer gavel CARE Act Book
Here are a few ways the government is alleviating the hit to retirement accounts

From Our Partners at PAI: The CARES (Coronavirus Aid, Relief, and Economic Security) Act has been a topic of discussion for weeks as legislators discussed the best way to give Americans a much-needed boost as the economy has faltered due to the Coronavirus. Signed into law in late March, there are several provisions that will help students, workers, and retirement plan participants to maintain more financial stability during this challenging time.

 

CARES Act changes retirement plan provisions for loans and tax-advantaged withdrawals

Retirees and workers alike have likely been groaning when looking at stock values over the last several weeks. While it takes some time for market volatility to level out, these provisions included in the CARES Act may provide retirement plan participants with additional flexibility and more options for loans and penalty-free withdrawals during this stressful time.

PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS

Workers who are experiencing financial difficulty due to the effects of COVID-19 on their careers, health, and overall financial wellness will be able to take a penalty-free distribution from a retirement account, like a 401(k) or IRA, between January 1, 2020, and December 31, 2020.

Under normal circumstances, there is a 10 percent penalty tax added to the taxes paid on distributions from a retirement plan before a participant reaches age 59 1/2. However, the CARES Act includes a provision that allows eligible participants to take up to a $100,000 distribution from a retirement account without the addition of the 10 percent tax that normally accompanies an early withdrawal. This tax-favored withdrawal may be repaid to an eligible retirement plan within three years of taking the distribution, with the option to repay beyond the normal annual contribution limits.

Eligible participants for a coronavirus-related distribution are those who have been diagnosed with the virus (or have a spouse or dependent diagnosed), experience adverse financial consequences as a result of being quarantined, unable to work, laid off, or those who had work hours reduced due to the virus.

TEMPORARILY INCREASED LIMIT ON RETIREMENT PLAN LOANS

The CARES Act is also temporarily increasing eligible retirement plan loan limits to $100,000 or 100 percent

of a participant’s vested balance, whichever is lesser. Including current outstanding loans, the Act will provide a one-year extension to the loan repayment deadline if the loan is due between the date of the Act’s enactment and December 31, 2020.

*Plans may not be required to incorporate the loan limit increases, so participants with questions should consult their plan sponsor or plan administrator to learn more.

Suspension of Required Minimum Distributions

Under normal circumstances, retired plan participants age 70.5 (or age 72, depending on whether you were born on or after July 1, 1949) and older are required to take distributions from their retirement plan based on the value of their accounts at the end of the previous year. With the volatility in the stock market in recent months, many retirees are faced with a decreased total value of their accounts and have concerns about RMDs not being responsive to their loss of value. As a response, the CARES Act includes a provision allowing plans to suspend making RMDs in 2020. A similar suspension of RMDs was allowed in 2009, following the 2008 financial crisis.

Additional Coronavirus relief for workers and business owners

While retirement accounts have certainly taken a hit during the recent episode of volatility, there are many other aspects of American life and the economy that have been impacted by COVID-19. The following legislation may be helpful for workers and business owners looking for more ways to make ends meet in 2020.

DIRECT PAYMENTS TO AMERICANS

The CARES Act includes stimulus checks for Americans, with or without jobs, and those who are currently living off Social Security payments. The one-time payment will be up to $1,200 per person, with married couples receiving up to $2,400 with an additional $500 per child under the age of 17. Eligibility is based on income, with assistance decreasing for those who make more than $75,000 annually, stopping with individuals making more than $99,000 and couples making more than $198,000 jointly. The payments are planned to be sent sometime before December 31, 2020 with a more specific date range to be determined.

DELAYED TAX FILING DEADLINE

Under normal circumstances, the deadline for filing federal income taxes is April 15, but the IRS has extended the deadline to file your 2019 federal taxes to July, 15, 2020. Taxpayers can also defer their income tax payments due on April 15 until July 15, 2020 without penalties or interest, regardless of the amount they owe. The new deadline and the optional deferment is available for all taxpayers, including trusts and estates, corporations, and other non-corporate tax filers.

DELAY IN STUDENT LOAN PAYMENTS FOR SIX MONTHS

The CARES Act includes a provision for those with student debt to defer payments without accruing additional interest for six months, or until September 30, 2020. Student loan borrowers who may otherwise have been unable to make payments due to financial hardship as a result of the Coronavirus can delay making payments, but must request the deferment option from their loan provider.

Separate from the CARES Act, Americans may be interested in an additional withdrawal option available thanks to recent SECURE Act provisions:

SECURE ACT BIRTH AND ADOPTION PROVISION

The SECURE Act, passed at the end of last year, included provisions designed to help families who are struggling with costs associated with the addition of a child to the household. During challenging times like the COVID-19 pandemic, retirement plan participants may consider taking advantage of the penalty-free withdrawal option from an IRA or 401(k), totaling up to $5,000 per parent per child.

Learn more about the provisions included in the SECURE Act

For more information about the changes to tax filing due dates and other provisions included in the CARES Act, visit Congress.gov to read the bill in its entirety. It’s also important to note that the new legislation allows retirement plans to adopt these new rules immediately. If the plan does not currently allow for loans or hardship distributions, they can amend the plan by the last day of the first plan year, beginning on or after January 1, 2020, or later pending additional guidance. For any questions, PAi suggests reaching out to a financial advisor or tax professional.

Tags: , , ,

More Insights

Apr 21, 2021

Recently, you may have seen reports that a record-low number of homes are available for sale—roughly 1.03 million nationwide. If you compare that to the average number of homes for sale during the past 10 years, it’s no surprise that many hopeful homebuyers are having issues securing a home. But why exactly is the housing … Continue reading “Forces Driving the Housing Market”

Apr 19, 2021

It can be exhausting trying to keep up with the whims of Wall Street. Lately, the financial markets have been fixated on federal taxes and what may be proposed on Capitol Hill in the weeks and months ahead. Wall Street’s focus on taxes closely follows its attention on the 10-year Treasury yield. And it wasn’t … Continue reading “The Whims of Wall Street”

Apr 16, 2021

President Joe Biden introduced the much-anticipated American Jobs Plan, which outlines an approach to spend roughly $2.2 trillion on the nation’s infrastructure and other projects. As part of the legislative process, the Biden administration also laid out a proposal for paying for the domestic investment. The plan includes raising the corporate tax rate to 28% … Continue reading “Paying for the Infrastructure Bill”

Apr 14, 2021

Financially, many of us associate the spring with taxes – but we should also associate December with important IRA deadlines. This year, like 2020, will see a few changes and distinctions. December 31, 2021, is the deadline to take your Required Minimum Distribution (RMD) from certain individual retirement accounts.

Apr 12, 2021

There’s an old Wall Street maxim that says, “markets climb a wall of worry.” And these days, there’s plenty to worry about with the trend in long-term interest rates and bonds.

Insights + Resources >