The economic decline and market volatility resulting from the Covid-19 pandemic has created anxiety around retirement planning and financial security in the United States. In response, the 2020 Coronavirus Aid, Relief and Economic Security Act (more popularly known as “the CARES Act”) brought immediate changes and relief to 401(k) retirement plans. First, plans now allow a participant to borrow up to 100 percent of his or her vested account balance or $100,000 – whichever is less. Second, granting individuals another year for 401(k) loan repayments means employers do not have to remove money from the employee’s paycheck.
Kari Middleton, Financial Advisor and Professional Plan Consultant at LPL Financial, was the moderator for the general industry HFTP Hangout that took place on Tuesday, June 16. In this session, she shared her expert knowledge on accessing retirement plans in 2020 – from the employer side of the paycheck to the employee side.
Here are some of the key takeaways regarding the 2020 CARES Act and its retirement planning-related provisions including:
- Waiver of penalty on early hardship withdrawals
- Increased loan limits
- Waiver of required minimum distributions (RMDs)
Waiver of Penalty on Early Hardship Withdrawals
The 10 percent penalty if you withdraw before you are 59 ½ years of age from an employer retirement plan or IRA is now waived for up to 100 percent up to $100,000. This is an aggregate amount from all sources of retirement accounts, including 401(k) and IRA accounts.
An individual qualifies for the exemption in the following circumstances: they are diagnosed with Covid-19, their spouse or dependent is diagnosed with Covid-19, or they are experiencing adverse financial consequences due to:
- being quarantined, furloughed or laid off; having work hours reduced; or being unable to work due to lack of childcare, all due to Covid-19; or the
- closing or hours reduction of a business owned or operated by the individual due to Covid-19.
Individuals can self-certify their qualification. In the past, if you took a hardship withdrawal, it was up to the plan administrator to sign off on the withdrawal. They had to attest to the hardship experienced by the individual making the request. Now the rules have been relaxed for tapping into your retirement accounts, and self-certification is allowed.
Additional flexibility has also been granted from a tax standpoint. Hardship withdrawals are still subject to income tax, but the tax can now be paid over a three-year period instead of having to pay up in the first year, and withdrawals may also be paid back over a three-year period.
The CARES Act has doubled the current loan limits for workplace retirement plans. It has been increased to the lesser of $100,000 or 100 percent of a qualified individual’s vested account balance and is available for loans made during the 180-day period following the date of enactment (March 27). The due date of any loan payment otherwise due in 2020 (on or after enactment date) has been extended for one year.
Qualification is the same as with hardship withdrawals (see above for the qualifying circumstances). Take caution: Consider your options when determining whether to take out a loan versus the hardship withdrawal. It will ultimately be treated as a loan that must be repaid, even if the employee’s financial situation takes a turn for the worse.
Making Plan Amendments
Plan sponsors are not required to adopt new CARES Act rules on loans and distributions. They may also choose to adopt even if a plan does not currently allow for loans and distributions. The deadline for plan amendments has been extended on or after the last day of the first plan year beginning on or after January 2022 (or January 2024 for government plans).
Required minimum distributions (RMDs) have been suspended for 2020. The market has been tumultuous, and the decision-makers ultimately do not want you to have to take an RMD if the market is at an all-time low. This means that you will not be forced to take money out of your plan unless you want to. At this time, 2019 distributions that still need to be taken in 2020 are also suspended.
This applies to account holders as well as beneficiaries taking stretch distributions. There is also some relief available for individuals who already took their RMD for 2020. You can pay it back and reverse that transaction if you choose to do so.
Another thing to point out: The Secure Act in January was eclipsed in this Covid-19 environment. But it is still important to bring up that prior to this year, you had to take an RMD if you were age 70 ½. The age was upped to 72. Going forward, the mandatory age actually went up quite a bit under other legislation.
Try not to withdraw from your retirement accounts unless you have no other choice. Taking money out of your retirement plan can negatively affect your future plans and can set you back on your path to retirement. This decision can be financially impactful in the long run and should be weighed considerably before taking action.
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