New Rules for Retirement Plans in 2020

Jun 27, 2020 | Retirement

The Coronavirus Aid, Relief and Economic Security (CARES) Act contains provisions that make it easier to withdraw funds in certain tax-advantaged retirement accounts like 401(k)s and traditional Individual Retirement Accounts (IRAs). These temporary changes eliminate tax penalties on certain early withdrawals and relax rules on loans from some types of accounts with the objective of helping Americans deal with the financial fallout of the coronavirus outbreak. The CARES Act also waives RMDs for 2020.


The CARES Act allows qualified individuals expanded distribution options in calendar year 2020 and favorable tax treatment for up to $100,000 of coronavirus related early distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs). The $100,000 is an aggregate amount among all of an individual’s retirement plans and IRAs; it is not an amount per retirement plan or IRA.

Who is a qualified individual for purposes of theses provisions of the CARES Act? An individual is qualified if diagnosed with the virus SARS-COV-2 or with coronavirus disease 2019 (COVID 19) by a test approved by the Centers for Disease Control and Prevention; if a spouse or dependent of that individual is similarly diagnosed; or if the individual, due to this virus or disease, experiences adverse financial consequences as result of (1) being quarantined, furloughed, laid off or having work hours reduced; (2) being unable to work due to lack of child care; or (3) the closing or reduction in hours of a business owned or operated by the individual. In a recent notice, the IRS expanded the definition of a qualified individual to include an individual who experiences adverse financial consequences due to COVID 19 as a result of a (1) reduction in pay or self-employment income or a rescinded job offer or delayed start date; (2) spouse or a member of the household being quarantined, furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed; or (3) the closing or reduction in hours of a business owned or operated by the individual’s spouse or a member of the individual’s household. The plan’s administrator may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus related distribution,

The 10% penalty ordinarily imposed on a distribution before an individual attains age 59 ½ does not apply to a coronavirus related distribution. Also, such distribution is not subject to the mandatory 20% federal tax withholding. That is not to say that there will be no federal taxes on the distribution, but the CARES Act provides flexibility in managing the resulting tax liability. A coronavirus related distribution is generally included in income ratably over a three-year period starting with the year in which an individual receives the distribution. For example, if an individual receives a $9,000 coronavirus related distribution in 2020, that individual would report $3,000 in income on his or her federal income tax return for each of 2020, 2021, and 2022. However, the individual has the option of including the entire distribution in income for the year of the distribution. Including the entire distribution in income for 2020 would be wise if it is anticipated that income will be increasing so as to take advantage of a lower tax rate.

Alternatively, the CARES Act gives an individual up to three years from the date the distribution is received to redeposit the withdrawn money into a retirement account. If the retirement funds are restored within three years, no taxes are owed, but an amended tax return may need to be filed to get back any tax paid before redepositing the funds into retirement savings. If, for example, an individual receives a coronavirus related distribution in 2020 and chooses to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and the individual chooses to repay the full amount to an eligible retirement plan in 2022, the individual may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution included in income for those years and will not be required to include any amount in income in 2022.


The CARES Act modifies rules for loans from qualified employer plans. Without the CARES Act, loans of the lesser of $50,000 or 50% of an individual’s vested balance, whichever is less, are allowed, and they must be repaid within five years, generally starting immediately.

The CARES Act allows employers to increase the maximum loan amount available to qualified individuals. For plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual’s vested benefit under the plan.

If a loan is outstanding on or after March 27, 2020 and any repayment on the loan is due from March 27, 2020, to December 31, 2020, the CARES Act allows the due date to be delayed under the plan for up to one year.

No relief is provided under the CARES Act if an individual loses his or her job with an outstanding loan; instead, the loan repayment deadline is governed by the Tax Cuts and Jobs Act. Under that Act, if there is a job loss and a loan is not repaid by the day the federal tax return, with extensions, is due for that calendar year, it is treated as a taxable distribution. For instance, if an individual loses a job at any time in 2020 after taking a 401(k) loan, October 15, 2021 is the deadline to repay the borrowed money into a retirement account or it will be treated as a taxable distribution. However, some plans or custodians may offer some flexibility in the repayment schedule.


Required Minimum Distributions (RMDs) from certain tax-deferred retirement accounts are not required for calendar year 2020. Because the size of an RMD is in part calculated using the balance of an individual’s tax-deferred account as of December 31 of the previous year, if 2020 RMDs had not been waived, the RMD would have likely meant a withdrawal of a greater percentage of an account and a tax bill on a value that may no longer exist.

If an individual has already taken a 2020 RMD, that RMD can be rolled back into a retirement account. The 60 day rollover period for RMDs already taken in 2020 has been extended to no earlier than August 31, 2020. The repayment is not subject to the one rollover per 12-month period limitation for IRAs. If taxes were withheld on the RMD, the entire amount of the RMD, before taxes were withheld, must be rolled over.

An employer is permitted to choose whether and to what extent to amend its plan to provide for coronavirus related distributions and/or loans. Thus, for example, an employer may choose to provide for coronavirus related distributions but choose not to change its plan loan provisions or loan repayment schedules. Before starting to complete any distribution or loan paperwork, check with the employer to see if these provisions of the CARES Act apply because even if one is a qualified individual, the employer may not necessarily follow the new, more permissive withdrawal and loan rules. For a distribution though, even if the employer does not treat the distribution as coronavirus related, a qualified individual may be able to treat the distribution as coronavirus related on his or her federal tax return.

This article was contributed by Allison J. Fried.

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