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1 1 (April 1, 2020)

handle is hein.crs/govcpzv0001 and id is 1 raw text is: FF. ' riE -E 3 $ri h ,. , April 1, 2020 Retirement and Pension Provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Congress provides a variety of tax incentives for employers to offer retirement plans and for individuals to save for their retirement. In addition, a number of restrictions exist to ensure that retirement funds are used for retirement purposes. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136) contains several provisions that affect pensions, retirement plans, and Individual Retirement Accounts (IRAs). Among other provisions, the CARES 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, and a delayed due date for employer contributions to private-sector defined benefit (DB) pension plans. Individuals can save for retirement by contributing to tax- advantaged defined contribution (DC) accounts (e.g., 401(k) plans) and IRAs. Employers often match some or all of an employee's contributions to DC accounts. To discourage pre-retirement withdrawals, the Internal Revenue Code (IRC) generally imposes a 10% penalty on the taxable amount of early withdrawals, which are withdrawals before an individual reaches age 591/2, dies, or becomes disabled. The penalty does not apply if the reason for the distribution is listed in 26 U.S.C. §72(t). Individuals who make early withdrawals are subject to rules that vary by plan type, the circumstances warranting a withdrawal, and plan-specific rules. IRAs generally have fewer restrictions on early withdrawals than DC plans. For example, individuals may withdraw funds from an IRA for any reason though generally with a penalty but pre- retirement withdrawals from a DC account (1) must be allowed by the plan and (2) must generally be on account of an employee's financial hardship (referred to as a hardship distribution). Loans are not permitted from IRAs. DC plans may but are not required to allow participants to borrow from their accounts. Loans may be preferred to early withdrawals because amounts borrowed can be repaid to the individual's account. However, in the case of a DC plan loan default (e.g., following job loss, the borrower fails to repay the outstanding loan balance by the deadline for that year's tax return), the loan balance must be included in taxable income and a 10% tax penalty applies. Provisions for DC plan loans under current law and regulations include the following: * The maximum loan amount is the lesser of half of the participant's vested account balance or $50,000. * Loans must be repaid in level installments over five years. Longer terms are permitted if loans are used for the purchase or construction of a principal residence. CV - 9 Ret -c nl Exempst fromn Section 2202 of the CARES Act exempts qualified individuals affected by COVID-19 from the 10% early withdrawal penalty for distributions (1) up to $100,000 and (2) taken from January 1, 2020, through December 31, 2020. Qualified individuals are individuals (1) who tested positive for COVID-19 or those with a spouse or dependent who tested positive for COVID-19, (2) facing financial difficulties due to being quarantined, furloughed, laid off, or unable to work due to lack of child care or reduced work hours as a result of COVID-19, or (3) whose business closed or reduced hours as a result of COVID-19. Plan administrators may rely on employees' certifications as proof that they are qualified individuals. Qualified individuals must include the amount distributed in their taxable income; however, they can report it as income either in the year received or equally over a three- year period. In addition, part or all of the distribution can be repaid to a qualified retirement plan within three years of receiving the distribution. Amounts that are repaid are treated as a trustee-to-trustee rollover (as if they were made directly from one financial institution to another, otherwise individuals might violate rules on rollovers or contribution limits). Nonqualified individuals may have the option to take a hardship distribution on account of a federally declared disaster, although this may vary based on whether their (1) state of residence qualifies for individual assistance under the disaster declaration and (2) retirement plan allows for such distributions. Nonqualified individuals may be subject to the 10% early withdrawal penalty on the amount distributed. Section 2203 of the CARES Act modifies rules governing DC plan loans for qualified individuals. Qualified individuals are defined in the same way as above. The following provisions apply: The maximum loan balance for loans taken within 180 days of the bill's enactment (March 27, 2020) is increased to the lesser of the participant's entire vested account balance or $100,000. K~:> rq\\ - , gn'a', ggmm 'S a X 11LULANJILiN,

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