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The COVID-19 pandemic has ravaged the financial markets of every country. It has left investors frustrated, confused and a little lost. With such volatile markets, businesses owners and individuals are wondering how and when their retirement plans and accounts will recover—and what they can do to help their plan and its participants, which include them individually as well. The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress on March 27, 2020, provides some provisions for relief. With the added flexibility provided by the act, plan administrators and participants now have additional options to attempt to navigate through the recent market turmoil.

How the CARES Act Helps Plan Participants

In addition to the economy as a whole, various segments of the construction industry as well as many of those involved in it have suffered financially during the pandemic. For many, retirement funds are one and sometimes the only means to obtain fast cash. The CARES Act provides more favorable options than previously available for using retirement assets as emergency funding during the financial downturn.

Distributions
401(k) and IRA plan participants can take early withdrawals of up to $100,000 if they:

  • Take their distributions anytime in 2020;
  • Certify that they, their spouse or a dependent was diagnosed with COVID-19, or that they suffered financially from the pandemic; and
  • Repay the distributions within three years.

If they qualify, the 10% early withdrawal penalty will be excludible and no federal income tax incurred on those distributions. Repayments would not be subject to contribution plan limits. If individuals do not repay the distribution within three years, they will be required to pay taxes on those amounts ratably over a three-year period. However, the exclusion of the penalty will still apply. Mandatory withholding on distributions has also been suspended.

Loans
Instead of taking distributions, plan participants can take loans of 100% of their vested qualified plan (not IRAs) balance up to $100,000 for loans made during the 180-day period from the date of enactment. Qualified plan loans are nothing new, but had been limited to 50% of the account balance up to $50,000. These loans often have a maximum five-year repayment period. The plan must provide for and specify the terms of the loan.

There is also a reprieve for repayments of existing plan loans. If participants are experiencing financial difficulties, loan payments due between March 27, 2020, and the end of the year can be suspended for up to 12 months. Interest will accrue during the deferral period. The delay is ignored for the maximum term period of the loan. Delayed payment plans should be documented so the loan is not deemed to be in default.

Required Minimum Distributions
Individuals over a certain age must receive required minimum distributions (RMD) from their accounts each year. The CARES Act temporarily suspended required minimum distributions (RMDs) for 401(k)s, 403(b)s, 457(b)s (but not defined benefit plans), and IRAs for 2020. Although this does not put money in the hands of taxpayers, it affords retirement plan investors the opportunity to defer taking distributions at a time when investment values are lagging and would produce an economic loss. Distributions already taken can be rolled back in if done within 60 days of the distribution.

Plan Amendments
If plans do not already include options for loans or hardship distributions, business owners should consider amending their plans for participants to take advantage of these new provisions. Businesses can begin to offer these options to plan participants immediately, even before they officially update their plan. Amendments must be filed by the last day of the first plan year that begins on or after Jan. 1, 2022, which would be Dec. 31, 2022, for calendar-year retirement plans.

Self-Certification
To qualify for a financial hardship distribution under the CARES Act, individuals need only self-certify that they meet the hardship requirements. These hardships include:

  • Being diagnosed (or having a spouse or dependent diagnosed) with COVID-19;
  • Experiencing financial difficulty from mandated quarantines or job upsets; and
  • Being unable to work because of child care needs.

Business owners and plan administrators are not required to verify these claims.

Many of the CARES Acts retirement plan provisions benefit employees, many of whom are also business owners and retirees. A relief provision was provided for businesses as well. Funding of defined benefit plans for payments due in 2020 can be deferred with interest until Jan. 1, 2021.

The retirement provisions are just a small part of the CARES Act, but they can provide benefits to current and former employees, retirees and employers alike.

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