Early Withdraws and Loans from Retirement Plans Affected by CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law by the President on March 27, 2020, has made changes to the rules regarding early withdrawals and loans from retirement plans.
Coronavirus-related distributions from eligible retirement plans are not subject to the 10% excise tax on early distributions. Distributions must be made on or after January 1, 2020 and before December 31, 2020 to an individual who is diagnosed with SARS-CoV-2 or COVID-19, whose spouse or dependent is so diagnosed, or who experiences financial hardship because of quarantine or other factors. Coronavirus-related distributions may not exceed $100,000 in the aggregate for any taxable year. Taxpayers may elect to ratably spread the income over a 3-year period beginning with taxable year 2020. Taxpayers may also avoid income recognition by repaying the distribution to the retirement plan within three years of receipt.
Loans from qualified employer plans up to $100,000 (increased from $50,000) are permitted in the 180 days beginning on the date of enactment of the CARES Act (March 27, 2020). The full present value of the nonforfeitable accrued benefit of the employee under the plan, as opposed to one-half thereof, is used in applying the IRC §72(p)(2)(A)(ii) exception to treatment of the loan as a taxable deemed distribution. For outstanding loans, repayment dates between the date of
March 27, 2020 and December 31, 2020 are delayed for one year, and subsequent payments as well as interest accrual are adjusted accordingly. A plan will not be disqualified as a result of plan amendments in accordance with the CARES Act provisions.
If you have any questions about the CARES Act or any other legal issues, please contact one of our Trusts & Estates and/or Tax Group attorneys or complete this form on our website.