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                                                                                                     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.

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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.


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