CARES Act Provides New Retirement Plan Distribution and Loan Options [Updated 5/8/2020]

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Originally posted on March 27, 2020.  This post has been updated to reflect guidance published by the Internal Revenue Service (IRS) on May 4, 2020.

The Coronavirus Aid, Relief, and Economic Security Act (the ‘‘CARES Act’’) was passed into law on March 27, 2020. The CARES Act provides additional flexibility for participants affected by the coronavirus (COVID-19) to (1) withdraw up to $100,000 from their eligible retirement plan accounts without penalty and with delayed taxation, (2) take plan loans under higher loan limits, and (3) postpone loan payments in 2020.

On May 4, 2020, the IRS released the first round of Frequently Asked Questions (“FAQs”) addressing the interpretation and application of the CARES Act relief.  This guidance confirmed that these CARES Act provisions are optional for employers, and that an employer can choose to adopt some, but not all, of the distribution and loan relief. 

Coronavirus-Related Distributions

Under the CARES Act, an eligible retirement plan (generally, an IRA or defined contribution plan) may permit a “coronavirus-related distribution” of up to $100,000 to an individual affected by the coronavirus. While these distributions are similar to hardship distributions, there are a few key differences. First, the distributions are exempt from the 10% early distribution penalty on in-service withdrawals before age 59 1/2 and from tax withholding, and taxation of the distribution may (at the option of the individual taxpayer) be spread ratably over three years. Second, all or part of the distributions may be recontributed to an IRA or qualified retirement plan within a three-year period without regard to that year’s contribution limits. Note that the $100,000 limit applies to all plans in an employer’s controlled group. A coronavirus-related distribution may be made on or after January 1, 2020, and before December 31, 2020.

A “coronavirus-related distribution” or CRD is defined as a distribution made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by regulations.  The FAQs indicate that the Treasury Department and IRS have received and are reviewing comments from the public requesting that the list of factors be expanded. As of May 8, 2020, no additional factors have been published.
The FAQs clarify that a qualified individual may treat a plan distribution that meets the requirements to be a CRD as such on the individual’s federal income tax return even if the employer does not treat the distribution as a CRD.

Plan Loans

The CARES Act includes two types of qualified plan loan relief for “qualified individuals” (defined as the same individuals entitled to a coronavirus-related distribution described above). First, the statutory loan limit for new a loan made to a qualified individual in the 180-day period after passage of the CARES Act is increased from $50,000 to $100,000, and the maximum loan amount for such individual is increased from 50% of a participant’s vested account balance to 100% of a participant’s vested account balance. Second, loan payments for the remainder of 2020 (after passage of the CARES Act) are suspended. After 2020, the remaining loan amount may be reamortized, and the maximum loan term, and statutory 5-year maximum (for non-primary residence loans) may be increased by the period of suspension.

The FAQs indicate that, with regard to loan suspensions under the CARES Act, the Treasury Department and IRS intend to apply the same principles in effect during 2005 for loan relief included in the Katrina Emergency Tax Relief Act of 2005 (KETRA).  Under KETRA guidance, an employer could follow a safe harbor that allowed for a period of loan suspension not to exceed the timeframe specified in KETRA, provided it resumed loan payments at the end of the suspension period, added interest accruing during the suspension period to the loan principal, and reamortized to provide substantially level installments over the remaining period of the loan.

Guidance specific to the CARES Act loan provisions is expected to be released in the near future.


Plans may implement these changes administratively immediately, with plan amendments to follow (generally 2022 for individually-designed plans or 2024 for governmental plans).

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