Tax-favored retirement plan loans and withdrawals if related to coronavirus

Several provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which became law last week, permit participants in certain types of retirement plans (described below) to make penalty-free withdrawals of up to $100,000 per calendar year from their plan and to request loans of up to $100,000 if the withdrawal or loan is for a coronavirus-related reason.

It is important to note at the outset that these new withdrawal and loan rules apply only to a participant in an employer-sponsored retirement plan, if the employer has elected to adopt amendments to the retirement plan incorporating the new rules. The CARES Act does not require an employer to permit withdrawals and loans from its retirement plans.

Coronavirus-related reasons include:

• being diagnosed with the SARS or COVID-19 diseases, including the diagnosis of the individual's spouse or dependent;

• experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced or being unable to work because of a lack of childcare due to such diseases; and

• closing or reducing hours of a business owned or operated by the individual due to such diseases.

PENALTY-FREE WITHDRAWALS

The CARES Act made changes to the tax laws with respect to coronavirus-related withdrawals by a participant from the following types of retirement plans:

• individual retirement accounts and annuities described in § 408 (all "§" references are to the Internal Revenue Code of 1986);

• qualified retirement and annuity plans described in §§ 401(a), 401(k) and 403(a);

• annuity contracts described in § 403(b); and

• deferred compensation plans, described in § 457(b), that are maintained by a State and any political subdivision or agency of a State.
  

The changes to the tax laws for coronavirus-related withdrawals include the following:

• The 10% early distribution penalty on amounts received prior to age 59½ is waived.

• The maximum amount that can be withdrawn during any one calendar year to an individual from all sources is $100,000.

• All retirement plans of an employer or related employer under which the individual participates are aggregated for the $100,000 limit.

• The restriction on 401(k), 403(b) and 457(b) plans prohibiting in-service withdrawals prior to age 59½ is waived. However, the similar restriction on defined benefit and money purchase pension plans prohibiting in-service withdrawals prior to age 59½ is not waived.

• Taxes on the amount withdrawn will be paid ratably over a three-year period beginning with the year of withdrawal, unless the participant elects to have the entire withdrawal taxed in the year of receipt.

• Within three years of receiving a distribution, a participant may make a tax-free rollback to a retirement plan of all or any portion of the amount withdrawn.

LOAN LIMITS INCREASED AND EXTENDED

The CARES Act also made changes to the tax laws governing a loan to a participant from the retirement plans described in the preceding section, if the loan is for a coronavirus-related reason. Loans may not be made to individuals from IRAs. These changes include the following:

• For the 180-day period beginning March 27, 2020, and ending September 22, 2020, a participant with a coronavirus-related reason may borrow up to the lesser of $100,000 or 100% of the participant's vested benefit in the plan (when combined with all other loans made to the participant from the plan and all other plans maintained by the employer or a related employer). This amount has increased from the lesser of $50,000 or 50% of the participant's vested benefit in the plan, which is the current limit applicable to loans from retirement plans.

• If a participant who has a coronavirus-related reason also has a loan that is due between March 27, 2020, and December 31, 2020, the loan may be extended for up to an additional one-year period, so long as the interest and principal installments are re-amortized to take into account the extended period. In addition, the five-year limit on the term of the loan is extended by the same period.

If you have any questions concerning retirement plan withdrawals and loans, please contact your Frazer Ryan or Whetstine Law Firm estate planning attorney at 602-277-2010.