Take-Away: The CARES Act just passed by Congress enables individuals to access their retirement accounts as a financial resource in this time of crisis.

Summary: A handful of the CARE Act provisions deal with the use of retirement accounts as a financial resource. A short summary of those provisions follow.

Section 2202- Waiver of 10% Early Distribution Penalty: Normally there is a 10% penalty imposed on distributions from retirement accounts, i.e. IRAs and qualifed plan accounts like 401(k) accounts if the owner of the account is not yet age 59 1/2. [IRC 72(t).] While there are are a couple of statutory exceptions to this 10% penalty, those exceptions are exceedingly narrow. The CARE ACT waives the 10% penalty for what it describes as coronavirus-related distributions.

Coronavirus-Related Distributions: This technical term is defined to mean: (i) an individual who is diagnosed with SARS, CoV-2 or COVID-13; (ii) the individual’s spouse or dependent is diagnosed with such viruses; (iii) an individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid-off, or having their work hours reduced; and (iv) individuals who are unable to work due to a lack of child care, business closing or reduced hours.

Taxable Income: While the CARE Act waives the 10% penalty for early distributions from a retirement account, the coronavirus-related distributiond is still taxable to the recipient.  However, that taxable distribution can be spread over a three (3) calendar year period, and thus it does not have to be recognized as taxable income in the year the coronavirus-related distribution is taken.

Re-contributions: If a coronavirus-related distribution is taken, it can be re-contributed over a three (3) year period to the plan from which it was withdrawn, or to another qualified plan in which the individual is a participant at the time of the re-contribution.

If the coronavirus-related distribution is recontributed it will be treated as if the amount were an eligible distribution from one qualified plan to another in a direct trustee-to-trustee transfer. In addition, the re-contribution to the qualified plan will not cause other contributions to the qualified plan to exceed the annual dollar limits normally imposed on contributions to a retirement account.

Unfortunately there was no reference to the re-contribution of coronavirus-related distributions to an IRA within the three year period. Hopefully the Department of Labor will address this omission when it issues regulations.

Qualifed Plan Loans: An individual cannot ‘borrow’ funds from an IRA. However, a plan participant can borrow funds from their qualified plan account. However, a plan loan is normally limited to $50,000 or 50% of the participant’s vested account balance.

From the CARE Act’s effective date through the following one hundred and eighty (180) days those statutory limitations are doubled. Consequently, a plan participant can borrow the lesser of $100,000 or 100% of their vested qualified plan account balance.

If a plan participant already has an outstanding loan that is being repaid in installments over a five (5) year period, required loan payments which are due prior to December 31, 2020, are suspended for one (1) year.

Plan Amendments: Qualified plans must be amended to reflect these new rules. However, the obligation to amend qualified plans is delayed until the last day of the plan year that started after January 1, 2020.

It is important to note that it is not necessary for a qualified plan to have previously allowed loans or hardship distributions in order for plan participants to immediately take advantage of these CARE Act changes.

Section 2203- Required Minimum Distributions Suspended: Required minimum distributions from retirement accounts for 2020 are suspended for this calendar year.

Section 3607- ERISA Deadlines: Much like the 2017 Tax Act, where Congress delegated blanket rule making authority to the Department of Treasury to implement the legislation,  with the CARE Act Congress delegated to the Department of Labor the blanket authority to postpone any ERISA deadlines with regard to qualified plans.

Section 3608- Defined Benefit Plan Contributions: Sponsors of existing defined benefit pension plans are given additional  time in which to make minimum funding contributions to those qualified plans. Any required minimum funding contributions to an existing defined benefit plan for 2020 is extended until January 1, 2021.

Conclusion: These are just highlights of how the CARES Act impacts retirement accounts and qualified plans. As the details become clearer, especially their impact on distributions from and rec-contributions to IRAs, expect to read more in the future.