Coronavirus Aid, Relief, and Economic Security (CARES) Act FAQ
On March 27, 2020, the President signed a $2 trillion relief package entitled the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is intended to provide “emergency assistance and health care response for individuals, families and businesses affected by the 2020 coronavirus pandemic.” This frequently asked questions (FAQ) is intended to address CARES Act provisions related to individual financial assistance to help individuals withstand the harsh impact of COVID-19.
IMPORTANT: Before considering or acting on any of the information included in this FAQ, individuals are advised to seek qualified counsel from their legal, tax and/or financial advisors.
If I am experiencing a dire financial need as a result of the COVID-19 pandemic, is there a way for me to access funds in my retirement accounts?
Potentially, yes. As it relates to your employer-sponsored retirement plan, there may be two provisions available to “qualified individuals”:
Coronavirus-related distribution (CRD): IF you are a “qualified individual” (see next Q&A for qualification requirements), you may be eligible for a CRD from one or more of your retirement accounts [e.g., 401(k), 403(b), 457, IRA, etc.] up to $100,000 in aggregate. CRDs must be made during 2020. Taxes due on CRDs may be spread equally over a three-year period. You may, but are not required, to repay the CRD back to your account(s) to avoid taxes. CRDs are exempt from the federal 10% penalty tax for early withdrawal.
Expanded loans amount: From March 27, 2020 until September 23, 2020, IF you are considered a “”qualified individual” (see next Q&A for qualification requirements), you may be eligible to apply for a loan up to the lesser of: 1) 100% of your vested account balance or; 2) $100,000. Loans are required to be paid back to the plan based on the specific loan provisions in your plan.1 Keep in mind that your plan may limit the total number of outstanding loans you are able to take from the plan.
To determine if you are a “qualified individual” and to determine if your plan has either of these options, contact your plan administrator or recordkeeper.
Who is a “qualified individual”?
A Qualified Individual is defined as someone:
- Who is diagnosed with the virus (via test approved by CDC); or
- Whose spouse or dependent is diagnosed with virus; or
- Who experiences adverse financial consequences because of the individual, the individual’s spouse or a member of the individual’s house experienced the following due to COVID-19:
- Quarantine, furlough, lay off, hours reduced, unable to work due to childcare; or
- Closing of business; or
- Other factors as determined by the Secretary of the Treasury.
You will be asked to self-certify that you meet the condition(s). To determine if you qualify and to self-certify that you meet one of the above criteria, contact your plan administrator or recordkeeper. Please keep in mind that just because you qualify, does not mean that your plan has adopted these provisions.
Can I claim the tax benefits of coronavirus-related distribution rules even if my Plan has not adopted the coronavirus-related distribution provisions?
Yes, if you are otherwise eligible for a distribution, are a qualified individual and your Plan has not adopted the CRD you may still claim the tax benefits of CRD on your individual tax filings.
If I am eligible for a distribution or a loan under the CARES Act should I take one?
While the CARES Act is meant to provide relief for both individuals and families, the provisions related to plan distributions should be viewed as a last resort. Taking distributions and loans from your retirement account may have long-term negative impacts on your retirement savings in addition to the potential for negative tax consequences. Before taking a loan or distribution, consider reviewing your budget and speaking to a qualified tax or financial advisor. The potential adverse impact of a distribution today on the future value of your retirement account illustrated in the table below:
If I take a COVID-19 withdrawal can I repay the amount into a qualified retirement plan?
Yes, but only if you are a “qualified individual”. You have three years from the day after the withdrawal was received to repay the amount into a qualified retirement plan (or any other plan or IRA that accepts rollovers). The withdrawal will be taxable if it is not repaid. Please note that you may need to file amended tax returns depending on withholding and how taxes were paid during the three-year period.
Can distributions be used for a rollover if I just want my money out of my plan?
No. Distributions are not eligible for a direct rollover. However, “qualified individuals” may take advantage of the three-year payback option.
What if I am not earning enough to make payments on my current plan loan or a new loan?
If you are a “qualified individual” and have loan payments due between March 27, 2020 and December 31, 2020 you may be able to defer loan payments for up to one year. Your interest will continue to accrue on the loan and the term of the loan will be extended. To determine if you qualify and if your plan adopted this provision, please contact your plan administrator or recordkeeper.
When can I request a loan payment suspension?
If you have a loan payment scheduled between March 27 and December 31, 2020, you may request to have your loan payments suspended at any time. Loan payments will resume January 2021. So, if you elect to suspend loan payments starting in May 2020, you will have eight months of payments suspended. If you elect to suspend payment starting in October 2020, you will have three months of payments suspended.
How does suspending loan payments affect the term of my loan?
The term of your loan will be extended by the same amount of time that the payments were suspended. So, using the examples above, if you suspend payments starting in May, you will have eight months added to the term of your loan and if you suspend payments starting in October, you will have three months added to the term of your loan.
How will suspending my loan payments in 2020 affect my loan payments in the future?
When loan payments resume in January 2021, your loan will be re-amortized. This means that interest that accrued during the time of suspended loan payments will be added to the balance of your loan which may increase your loan payment in the future. The amount of the increase will depend on the amount of interest accrued and the remaining term of your loan. For most individuals, the increase should be relatively small.
What are the changes to the Required Minimum Distribution (RMDs) under the CARES Act?
Under the CARES Act, all RMDs are waived for 20203. If an RMD was already taken during 2020, then you may roll it over and defer paying taxes. You may still take an RMD for 2020 but you are not required to do so. Those receiving installment payments may still count them as RMDs event though they are not required for 2020.
If I have federal student loans is there anything that will help me right now?
Yes, the Department of Education announced that from now until September 30, 2020, federal student loan borrowers are automatically being placed in an administrative forbearance, which allows you to temporarily stop making your monthly loan payment. For more information, go to the Department of Education’s website.4 If your loans are not federal student loans, be sure to contact your lender if you need assistance.
Should I continue to contribute to my retirement plan?
If you are able, you should continue to contribute to your Plan. Volatile markets or the need for money now does not change the need for retirement savings later. In addition, by consistently contributing through up and down markets helps lower your average cost of your investments. This is known as “dollar-cost-averaging”. By continuing to contribute to your retirement plan, you may accelerate the rate of recovery of your pre-COVID-19 balance by purchasing securities at lower prices.
What are my options if I am terminated or furloughed?
If your employment has terminated, you are likely eligible for a distribution of your vested account balance.
- “Qualified individuals” would be permitted to take a CRD.
- The timing and options available to you will be determined by your plan.
If your employment has not terminated, but rather, your hours are reduced, you are furloughed, and/or are subject to a temporary layoff or leave of absence, then you may still be considered actively employed and are not eligible for a normal distribution. However, you may be eligible to take a withdrawal or loan from your plan depending on your individual circumstances and plan rules. For example:
- You may be eligible to take a CRD; or
- You may be eligible to take a hardship or age 59 ½ withdrawal; or
- You may be eligible to take out a loan.
Please contact your plan administrator or recordkeeper to determine options available to you.
What should I do about my investments during times of market volatility?
Nonstop news cycles compounded with daily swings in the financial markets is unsettling. However, history proves that markets eventually recover. Accordingly, you should avoid making investment decisions based on emotion or today’s current market conditions. Saving for retirement is a long-term endeavor and patience is usually a winning strategy.
Trying to “time the market” is a fool’s errand. Instead, establish and stick to an asset allocation strategy based on your age and when you will need to start drawing down your savings. Some strategies will automatically become more conservative as you age. If you are unsure about your strategy, take advantage of the tools offered by your recordkeeper’s website or schedule an appointment with your plan’s financial advisor.
If I am close to retirement, will I still be able to retire given the market volatility?
Recent market swings will not necessarily derail your retirement plans. However, maintaining an appropriate asset allocation strategy based on your age along with continuing to save while working is the best strategy to accelerate your rate of recovery. If you are unsure about your strategy, take advantage of the tools offered by your recordkeeper’s website or schedule an appointment with your plan’s advisor.
What other actions should I consider taking, if any:
- Review your asset allocation strategy and consider rebalancing your portfolio.
- If possible, consider increasing or maintaining your current savings.
- If you are in or approaching retirement, review your living expenses and sources of income.
- Schedule an appointment with a qualified tax or financial advisor.
- Keep an open line of communication with your plan administrator and recordkeeper.
If you would like to discuss your situation, please reach out to David Mann at dmann@hcadv.com or Dave Rowe at drowe@hcadv.com to schedule a call or online consultation.
Footnotes:
1 In general, the IRS only allows loan amounts of the lesser of 50% of your vested account balance or $50,000 offset by the highest outstanding loan balance during the past 12-months. Even if your plan has these options available and you qualify for the provision(s), you may experience a delay in receiving your loan or distribution from your plan’s service provider. Keep an open line of communication with your plan administrator and service provider as all parties are in the process of implementing these emergency provisions.
2 Cash Today represents a coronavirus-related withdrawal. The assumed rate of return for all future value calculations is 8% and assumes a withdrawal is not rolled back into a tax-qualified retirement account. This information is for illustrative purposes only. Actual results will vary.
3 Please note the SECURE Act changed the age of RMDs from 70 ½ to age 72 for those who will attain age 70 ½ after December 31, 2019. This is a new provision for 2020.
4 See: https://studentaid.gov/announcements-events/coronavirus