The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) offers a variety of aid to US employers and the American workforce in face of the coronavirus pandemic. One of the areas that the CARES Act addresses is benefits to individuals, both directly from the federal government, and through several changes to the rules governing tax-qualified retirement plans.
One-Time Stimulus Checks:
Individuals may be eligible for a one-time payment of $1,200 ($2,400 in the case of individuals filing a joint return) from the federal government, provided their income does not exceed certain thresholds. The federal government will look at an individual’s 2019 tax return to determine eligibility. If the individual has not filed in 2019, the government will look at his/her 2018 tax returns.
Individuals are also eligible for a one-time payment of $500 per qualifying child. A qualifying family of four could potentially receive $3,400 ($2,400 plus two qualifying child payments of $500 each). A qualifying child generally is a child, grandchild, sibling, niece or nephew of the individual (or a descendant), who is a dependent of the individual, is under age 17, and lives with the individual for at least half the year.
The amount of the one-time payments will be reduced (but not below zero) by 5% of the amount that an individual’s income exceeds the applicable threshold. Generally, the application of the above thresholds would mean that a single individual with no children who earns more than $99,000, or a couple with no children who earn more than $198,000 would not receive any payment under this program. Also note that an individual/family earning above the applicable threshold may not receive the qualifying child payment. The income thresholds are:
- $75,000 in the case of an adult filing as single;
- $150,000 in the case of a joint return; or
- $112,500 in the case of a head of household.
Example: An individual filing as single who earns $85,000 per year would receive a payment of $700 ($1,200 - $500 (which is 5% of $85,000 - $75,000)).
These one-time stimulus payments are expected to be paid out around mid-April but could be delayed.
The federal government is increasing unemployment compensation in connection with the coronavirus pandemic. But, in order for individuals in a state to benefit, that state must elect to participate in the federal program. As a condition of participation, a state must agree to not reduce its unemployment benefits as an offset to this federal program.
In participating states, the federal government will fully fund workers' first week of unemployment benefits if the state suspends the one-week waiting period. This federal program also helps workers by providing them with $600 per week in increased benefits for up to 4 months (through July 31, 2020), in addition to the state’s regular weekly unemployment benefits. Furthermore, this program provides 13 additional weeks of federally-funded unemployment benefits through December 31, 2020 for workers who remain unemployed and have exhausted their state benefits. Payments must be made on a weekly basis, either together with the normal state unemployment amounts or separately (but on the same weekly schedule). Total unemployment benefits cannot exceed 39 weeks.
Retirement Plan Distributions:
The CARES Act creates a new distribution option for participants in eligible retirement plans (including 401(k), 403(b), and 457(b) plans, as well as individual retirement accounts (IRAs)). This new distribution option allows participants to take distributions of up to $100,000 from their retirement plans prior to December 31, 2020, without incurring the ten percent (10%) early-withdrawal penalty which normally applies to withdrawals made prior to age 59½. This special distribution option only applies to participants who have experienced adverse financial consequences resulting from the coronavirus, including experiencing a reduction in work hours, being laid off, quarantined, or furloughed, being unable to work due to lack of childcare on account of the disease, or due to the participant, his or her spouse, or a dependent being diagnosed with the virus. A coronavirus-related distribution is not subject to mandatory tax withholding. An employer may rely on an employee’s certification that he or she qualifies for a coronavirus-related distribution.
If a participant chooses to take a coronavirus-related distribution, he or she has up to three years to repay the amount back to the plan (or another eligible plan) to avoid having the amount taxed as income (a participant may choose to repay all or a portion of the coronavirus-related distribution at any point during the applicable three-year period). If the participant does not repay the full distribution amount prior to the end of the applicable three-year period, he or she will include 1/3 of the unpaid portion of the distribution as taxable income in each of the following three years (although a participant can always elect to include the entire unpaid portion in income earlier).
Normal Hardship Withdrawals
The addition of the new coronavirus-related distribution option discussed above does not change how regular hardship withdrawals work under a qualified retirement plan. Participants can still receive hardship withdrawals for reasons unrelated to the coronavirus. Furthermore, as has been the case since 2018, plans have been allowed to elect to expand the normal hardship withdrawal rules to include hardships related to federally declared disaster areas. Under these disaster area rules, plan participants may take hardship withdrawals to cover expenses and losses (including loss of income) incurred by the participant on account of the disaster, provided that such individual’s principal residence or principal place of employment is located within the declared disaster area.
Plans should communicate with participants, explaining the availability and details of the new coronavirus-related distribution option. Additionally, employers should review their plan documents. If a plan does not provide for hardship withdrawals, or has not expanded the hardship withdrawals to include the new disaster area rules, an employer can elect to implement such rules and plans can begin making such distributions immediately, provided that the plan is amended by the end of the 2020 plan year to incorporate these changes.
The CARES Act increases the amount that a participant may borrow from his or her qualified retirement plan. For the 180-day period following the enactment of the CARES Act, participants in a qualified plan may borrow amounts up to the lesser of $100,000 (increased from $50,000); or their entire vested account balance (increased from 50% of their vested account balance) from their account.
Additionally, participants with outstanding plan loans who would qualify for a coronavirus-related distribution are not required to make any payments on such loans for one year (i.e., no loan repayments required in calendar year 2020), though interest will accrue.
Plans should provide participants with updated information regarding the availability of the increased loan amounts and information about the loan repayment suspension as appropriate.
Required Minimum Distributions:
Required minimum distributions from defined contribution plans and individual retirement accounts are waived for calendar year 2020. This will apply to both the required minimum distributions due in 2020 in respect to 2019, as well as the required minimum distributions due in 2021 in respect to 2020. Note that this waiver does not currently cover tax-qualified defined benefit plans.
Plans should provide participants with notice of the suspension of required minimum distributions for calendar year 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.