The following information is provided for informational purposes and is not intended to provide, nor does it constitute tax advice. If you have questions specific to your account with Eastern Michigan Bank, please contact your local branch. If you have questions specific to your tax situation, please consult your tax advisor.
THE CARES ACT
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted.
Among its numerous provisions designed to help bolster the economy and provide a measure of financial security to Americans as the country battles the coronavirus, the law contains several important provisions designed to provide Americans with increased access to and flexibility with their retirement savings.
While some provisions of the CARES Act and other federal relief are available to all individuals, other options are limited to individuals who meet certain criteria. Under the CARES Act, individuals who meet the definition of a “Qualified Individual” are potentially eligible to take advantage of special retirement distribution options (“Coronavirus-Related Distributions”) as well as special retirement plan loan options.
QUALIFIED INDIVIDUALSTo be considered a “Qualified Individual” and, therefore, eligible to take advantage of the CARES Act provisions concerning “Coronavirus-Related Distributions” and increased retirement plan loan limits and flexible repayment options, an individual must qualify under one (or more) of the following categories:
Someone Whose Spouse or Dependent is Diagnosed
Someone Who Experiences Adverse Financial Consequences
- as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease;
- being unable to work due to lack of child care related to such virus or disease;
- for business owners, being unable to work due to the closing or reduction of hours of a business owned or operated by the individual, or;
- other factors determined by the Secretary of Treasury.
Exemption from 10% Early Distribution Penalty
Taxable Over Three Years (Optional)
Up to Three Years to Repay (Optional)
INCREASED LIMIT ON PARTICIPANT LOANS
The CARES Act also contains provisions allowing employers to provide Qualified Individuals with increased access to workplace retirement savings in the form of plan loans.
Under normal circumstances, the maximum loan a plan participant may typically take from a workplace retirement savings plan is the lesser of:
- 50% of the participant’s vested plan balance or;
Under the CARES Act, plan sponsors may (but are not required to) increase the maximum loan amount for “Qualifying Individuals” to the lesser of:
- 100% of the Qualified Individual’s vested plan balance or;
OPTION TO SUSPEND PLAN LOAN REPAYMENTS FOR REMAINDER OF 2020
In addition to increasing the limit on plan loans, the CARES Act provides Qualified Individuals with the option to suspend loan repayments for the remainder of 2020 on participant loans taken from workplace retirement savings plans. Under normal circumstances, plan participants must generally make plan loan repayments at least quarterly (or more frequently) and plan loans must generally be repayable within five years.
Under the CARES Act, Qualified Individuals are not required to make plan loan payments for the remainder of 2020, and loan repayment time frames are extended to reflect the suspension period. This loan repayment relief is available to Qualified Individuals for both new plan loans as well as for existing plan loans that were outstanding on March 27, 2020.
WAIVER OF 2020 RMD REQUIREMENTS
In addition to providing increased access to retirement savings, the new law waives all required minimum distributions (RMDs) for 2020. Under normal circumstances, federal laws typically require individuals of a certain age (historically age 70½but recently changed to age 72) to take mandatory distributions from their retirement savings. Under the CARES Act, these mandatory distribution requirements are waived for 2020.Individuals Already in Distribution Status
For individuals who were already in required distribution status (generally, those who turned 70½ prior to 2019), the law waives the mandatory distribution requirement for 2020.
Individuals Just Beginning RMDs
RMD Relief Also Available for Beneficiaries
In addition to providing RMD relief for plan participants and IRA owners, the law provides temporary relief from the required distribution rules that apply to beneficiaries of deceased plan participants and IRA owners.
For beneficiaries, the form of relief varies depending on (1) when the plan participant or IRA owner passed away and (2) the beneficiary distribution option to which the beneficiary is subject. The 2020 RMD is waived for beneficiaries taking some form of life expectancy distributions. For beneficiaries subject to the 5-Year Rule, the 2020 calendar year is to be excluded when determining the applicable 5-year distribution time frame.