A CARES ACT measure alters the rules for employee benefits, affecting retirement savings. In normal times the tax law restricts access to retirement funds for nonretirement purposes. These are not normal times. Two major changes that will free up cash for current expenses are the waiver of certain penalties for withdrawing from an IRA or 401(k) distribution and an opportunity to take enhanced plan loans.
The provisions for “qualified individuals”, allows you to withdraw up to $100,000 from a retirement account (IRA, 401(k), etc.) and you won’t have to pay a 10% penalty even if you’re not 59½ years old.
Under normal circumstances, owners of certain workplace retirement accounts — including 401(k)s, 403(b)s, and 457 plans — are allowed to borrow up to $50,000 or 50% of their vested balance, whichever is less, from the account. The CARES Act increases that amount to $100,000 or if lower, 100% of your account balance. The increased limits are applied for six months beginning March 27, when the bill was signed.
The law allows you to suspend any loan repayments until next year. It extends the normal repayment period from five years to six years. The loan rules also are only available if you are entitled to a CRD.
To qualify for this type of distribution, the employee must certify that either:
- The employee, or their spouse or dependent, was diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC), or
- The employee is experiencing adverse financial consequences related to COVID-19 as a result of:
- being quarantined;
- being furloughed, laid off, or having reduced work hours;
- being unable to work due to lack of child care;
- closing or reducing hours of a business owned or operated by the employee; or
- other factors as determined by the Secretary of the Treasury.
Plan sponsors can rely on an employee’s self-certification that the employee meets the conditions for a coronavirus-related distribution.