Congress passed the CARES Act on March 27, 2020 with an immediate effective date. The CARES Act provides provisions for a new coronavirus related distribution, repayment of distributions, increased loan limits, extended loan repayment periods and waiver of the 10% early distribution penalty.

What is a coronavirus related distribution (CRD)?CARES Act

A CRD includes any distribution made between January 1, 2020 and December 31, 2020 to an individual:

  • Who has been diagnosed with COVID-19 by a CDC approved test
  • Whose spouse or dependent has been diagnosed with COVID-19 by a CDC approved test
  • Experiencing financial consequences because of being furloughed, quarantined or laid off or having their paid work hours reduced as a result of COVID-19

Employers can rely on an individual’s certification that the individual qualifies for the distribution.

The maximum an individual may withdraw is $100,000; this limit applies across all plans and IRAs.

Permitting CRDs is optional and will require a plan amendment by the end of plan year beginning on or after January 1, 2022.

Will the 10% early distribution penalty tax apply to CRDs?

No. The 10% penalty tax will not apply to CRDs.

The waiver applies to distributions from 401(k) and other 401(a) plans, 403(b) plans, 457(b) governmental plans and Individual Retirement Accounts (IRA).

Are CRDs generally subject to ordinary income tax?

Yes. However, the income tax due on the distribution may be spread over three tax year periods.

Furthermore, individuals can repay all or part of the distribution within three years from the date of distribution to any plan or IRA which accepts rollovers. Repayments will be treated as rollover contributions.

Have participant loan limits been adjusted?

Yes, for participants that meet the CRD requirements. If allowed by the plan, the maximum loan limit increased to the lesser of $100,000 or 100% of the vested account balance. The increase applies to loans taken for a period of 180 days after March 27, 2020. The increase applies to 401(k) and other 401(a) plans, 403(b) plans, and any governmental plans.

The new loan limits are optional and will require a plan amendment by the end of plan year beginning on or after January 1, 2022.

Have loan repayment periods been extended?

Yes, for participants that meet the CRD requirements and have an outstanding loan balance on or after the date of enactment and loan payments due from date of enactment through December 31, 2020. Payments are delayed by one year (or, if later, 180 days after enactment). Interest continues to accrue on the loan during the delay period. The five-year repayment period is also extended for one year.

The new repayment period is optional and will require a plan amendment by the end of plan year beginning on or after January 1, 2022.

Are 2020 Required Minimum Distributions (RMD) waived?

Yes. The requirement to take an RMD in calendar year 2020 is waived. If the RMD is due to death, the five-year maximum period is determined disregarding 2020.

What are my options if my 2020 RMD has already been distributed to me?

Any distribution made in 2020 that would have been treated as an RMD prior to the 2020 waiver can be rolled over in accordance with the 60-day rollover rules. The RMD amount includes any income taxes withheld. It is not yet clear if the IRS will make changes to the 60-day window or to the IRA one-rollover-per-year rule.

The waiver applies to 401(k) plans, 403(b) plans, 457(b) governmental plans and IRAs.

Please contact the professionals at Gilliam Bell Moser for further guidance.

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Brett Davidson CPA - Greensboro CPA

Brett Davidson, CPA/PFS
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