CARES Act: Retirement and Pension Plan Provisions

The CARES Act contains several provisions that affect pensions, retirement plans, and Individual Retirement Accounts (IRAs). Among other provisions, the Act includes an exemption to the 10% tax penalty for early withdrawals from retirement accounts for individuals affected by COVID-19, one-year relief from Required Minimum Distributions (RMDs) for all retirement plan account holders, modifications to retirement plan loans, and a delayed due date for employer contributions to private-sector defined benefit (DB) pension plans. 


This report from the Congressional Research Service provides more information for plan sponsors, and we have also highlighted some of the provisions impacting individuals below.


Retirement Plan Funds

Generally, the amounts an individual withdraws from a qualified retirement plan before reaching age 59 ½ are called “early” or “premature” distributions.  Individuals must pay an additional 10% early withdrawal penalty tax in addition to paying ordinary income tax on the distributed funds.

The CARES Act provides one additional exception to avoid a 10% early withdrawal penalty.  If a “coronavirus-related distribution” is made during 2020 to an individual:

  • Who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
  • Whose spouse or dependent is diagnosed with one of the two diseases, or
  • Who experiences adverse financial consequences as result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.

The distribution is still subject to ordinary income tax but can be spread over a 3-year period beginning in 2020.  A taxpayer may avoid the ordinary income tax if the distribution is repaid within three years of receiving it.


Retirement plan loan rules are also modified. The total amount allowed to be borrowed from the plan has been increased from $50,000 or 50% of the vested account balance to the lower of $100,000 or 100% of the vested account balance for loans made between March 27, 2020 and December 31, 2020. The due date for repayment of the loan is delayed one year and the loan must be coronavirus-related.


Required Minimum Distribution

The SECURE Act of 2019 changed the age a taxpayer is required to make a distribution from his IRA to 72. Beginning in years after December 31, 2019 a taxpayer would not need to make a distribution until they turn age 72. 


The CARES Act halted the requirement to make a required minimum distribution in tax year 2020. Therefore, a taxpayer will not have to make a required minimum distribution until the 2021 tax year and only if they have turned age 72.


Generally, a 60-day rollover rule applies to indirect rollovers of all or a portion of the assets in a qualified retirement account, such as an IRA or 401(k). There was no relief provided for those taxpayers who received a distribution prior to enactment of the Act and cannot meet the 60-day rollover rule.


Example – John Smith is age 72 beginning January 1, 2020. He made a distribution from his IRA account on January 15, 2020. The amount is taxable even though the CARES Act, passed on March 27, 2020, specifically mentioned required minimum distributions are not required in 2020 due to COVID-19. The CARES Act did not provide guidance on RMD’s made in earlier 2020 that do not meet the 60-day rollover rule. John’s RMD exceeds the 60 day period. 

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