News and Commentary

COVID-19 Stimulus Package Provides Penalty-Free Relief for Retirement Savers, Retirees and Plan Administrators By Sean Deviney, CFP®*

The Coronavirus, Aid, Relief and Economic Security Act (CARES Act), signed into law on March 27, 2020, offers individuals the ability to tap into their retirement savings plans, including IRAs and 401(k)s, to access needed funds without incurring early-withdrawal penalties. This relief is similar to the way in which the IRS lifts restrictions to defined contribution plan distributions following a natural disaster. However, it is not yet known how the IRS will ultimately process and treat these provisions of the new law.

For purposes of this article, we will focus on the law’s changes to defined contribution plans and IRAs. Additional relief for defined benefit plans will be addressed in a separate article.

Coronavirus-Related Retirement Plan Distributions

Under the CARES Act, qualifying individuals may withdraw up to $100,000 from retirement plans between January 1 and December 31, 2020, without incurring the 10 percent early-withdrawal penalty that would otherwise apply. The IRS will treat these distributions as taxable income to account owners evenly over a three-year period, unless the owner elects out of this option. Taxpayers will have the option to repay distributions back into their 401(k) plans or IRAs within three years to avoid all income taxes. It is expected that those repayments will not be subject to annual contribution limits.

These hardship distributions are available to individuals who receive a diagnosis or who have a spouse or dependent diagnosed with novel coronavirus as well as any retirement savers who experience financial hardship as a result of the economic fallout from the virus. This includes individuals who are quarantined, furloughed, laid off, working reduced hours, and who are unable to work due to lack of childcare due, business closings or other factors as determined by the Secretary of the Treasury.

Sponsors of 401(k) plans may rely on employees’ self-certification that the requested distribution meets the COVID-19 criteria.

Retirement Plan Loans

Individuals eligible for COVID-19-related retirement plan early distributions also have the option to take a loan from their qualified contribution plans of up to $100,000 or 100 percent of their vested account balance. Taxpayers have up to five years to repay these loans, however, any outstanding retirement plan loans with a repayment deadline in 2020 can only be extended for an additional year.

This is an optional change for defined contribution plans. Companies wishing to increase the loan limits and repayment terms must amend their plan documents.

Required Minimum Distributions (RMD) for Retirees

Individuals age 72 or older who are typically required to take annual minimum distributions from their IRAs, 401(k)s, 403(b)s and government 457(b) plans, may forgo those RMDs in 2020. With this waiver, retirees may keep money in their retirement accounts, which may have suffered from the recent market volatility, and allow those investments to recover and continue to grow.

It is important to note that this waiver also applies to individuals who turned age 70 ½ in 2019 but deferred their first RMD to 2020.

Plan Administrative Duties

The CARE Act gives administrators of defined contribution plans the flexibility to immediately implement these relief programs for the benefit of plan participants while granting them until 2022 to adopt them as amendments into their plans.

Retirement plan participants, sponsors and administrators taking advantage of this relief should work with their professional advisors to ensure they implement best practices that will meet regulatory compliance.

About the Author: Sean Deviney is a CFP®* professional, a retirement plan advisor and a director with Provenance Wealth Advisors (PWA), an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors + CPAs. For more information, call (954) 712-8888 or email info@provwealth.com.

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Sean Deviney is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.  Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.  PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Please note that changes in tax laws may occur at any time and may have a substantial impact on each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.


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