CARES Act 2020: Coronavirus-Related Relief Enhances Access to Retirement Plan Assets

Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) makes it easier for Americans to withdraw savings from certain tax advantaged qualified retirement accounts by eliminating tax penalties on certain early withdrawals and relaxing rules on certain plan loans.

Specifically, the CARES Act creates a new type of hardship withdrawal, known as a “coronavirus-related distribution” or CRD, and also expands permissible plan loans a participant can take during 2020.

The CARES Act legislation restricts loan relief to qualified retirement account owners and plan participants with a valid coronavirus related reason for early access to retirement funds. The new, and likely temporary, options are available to individuals who meet one of the three criteria described below.

You may be eligible to receive a CRD or enhanced plan loan if you:

• are diagnosed with COVID-19 or SARS-CoV-2 by an approved test,
• have a spouse or dependent who is diagnosed with COVID-19 or SARS-CoV-2 by an approved test, or
• experience related adverse financial consequences because of a quarantine, layoff, furlough, reduction in hours due to the coronavirus, being unable to work due to lack of child care due to the coronavirus or because of the closing or reducing hours of a business owned or operated by the individual, or other factors as determined by the Secretary of the Treasury.

In addition to eligibility, your employer must decide whether to adopt the new rules. Plan sponsors can choose not to offer CRDs and enhanced loans. The CARES Act does not require employers to follow the new, more permissive withdrawal and loan rules, and not all retirement plans will accept the CARES Act provisions for coronavirus related hardships. Cohen & Buckmann, P.C. wrote,

“Even plans that do not currently authorize participant loans or in-service distributions will be able to use these tools and adopt plan amendments by the end of the first plan year beginning on or after January 1, 2022.”

You should check with your plan sponsor or employer first to see what coronavirus related relief the plan will offer.

The CARES Act Enhanced Loan Rules

How are enhanced plan loans different from regular plan loans? Under normal circumstances, plan participants are allowed to borrow up to $50,000 or 50% of their vested account balances – whichever is less.

The CARES Act doubled the amount that plan participants can borrow from qualified retirement plan accounts. Now, eligible individuals can borrow 100% of their vested account balances up to a maximum of $100,000.

The table below compares the provisions of typical plan loans and enhanced plan loans.

*Repayment terms may be different for loans used to purchase primary residences.

**If a loan is outstanding on or after March 27, 2020 and any repayment on the loan is due from March 27 to December 31, 2020, that due date may be delayed under the plan for up to one year. Any payments after the suspension period will be adjusted to reflect the delay and any interest accruing during the delay. 

The material in this blog is presented for general informational purposes only and does not constitute tax or legal advice. Rules regarding coronavirus related distributions are newly enacted, and limited guidance exists and is subject to change. Speak with your employer, plan sponsor and tax and financial advisors to ensure you understand enhanced plan loan rules and how they may affect your particular situation.

Enhanced plan loans are for when you really need one.

In general, withdrawing savings from retirement accounts should be a last resort – even when loan terms are more favorable than usual.

Individuals should check with their plan sponsors regarding CARES Act relief, and weigh the pros and cons of withdrawing funds set aside for retirement.

Ultimately, when you take money out of your retirement account, you run the risk of having less savings available for retirement. In addition:

• You may lose on your investments. Taking a loan means liquidating a portion of your portfolio right now while markets are down. If the investments sold have declined in value, then you lock in losses now, rather than waiting for the markets to improve.
• You may face expensive penalties. If you do not repay the loan, it is treated as a distribution. You may owe full income taxes on the loan amount plus a 10% early withdrawal penalty in the year of default.
• You may face difficulties created by repayment. If you leave your job, you may have to repay the loan more quickly than originally expected. In addition, payments may be high and you may not be able to afford them, leading to a default. If you can’t repay the loan, you may owe taxes and an early withdrawal penalty.
• You may face unfavorable tax consequences. You must use after-tax dollars to pay the plan loan interest. This means you are taxed on the interest payment twice – income tax is paid on the amounts again when you withdraw from the account in retirement.

The economic impacts of the coronavirus pandemic are forcing individuals to make tough financial decisions, but before you tap into your retirement savings, consult your tax and financial advisors to carefully evaluate if an enhanced plan loan is the best option for you.

Again, your financial and tax advisors can help you understand what is best for your unique situation, so be sure to consult them before taking action.

Learn more about coronavirus-related distributions.

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The material in this blog is presented for general informational purposes only and does not constitute tax or legal advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.