The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced a variety of assistance to businesses, industries and individuals. Perhaps the most talked about assistance was the establishment of the Paycheck Protection Program and the Payroll Protection Loans offered through that program.
Here we will focus on provisions of the CARES Act aimed at providing assistance to individuals.
Provisions Providing More Flexibility in the Use of Retirement Account Funds
The CARES Act expanded the ability to take in‐service distributions from employer retirement plans by allowing for up to $100,000 in distributions without being subject to the 10% premature distribution penalties for qualified individuals. Furthermore, participants may elect to have the distribution taxed over a 3 year period, if desired, and the distribution can be recontributed to another eligible retirement plan within 3 years as a rollover. Individuals must be able to provide that COVID‐19 affected them personally. The employer provided retirement plan must allow for in‐service distributions and must be amended to specifically allow for the CARES Act distribution.
The CARES Act also provides for qualified individuals to take up to a $100,000 loan from their employer provided retirement plan. Participants do not have to start paying the loan back until January 1, 2021. These loans must be taken between March 27, 2020 and September 23, 2020 and individuals must be able to prove that COVID‐19 effected them personally. The employer provided retirement plan must allow for participant loans and must be amended to specifically allow for the expanded loans.
Early distribution and loan provisions under the CARES Act is restricted to individuals with a COVID‐19 related reason for early access to the retirement funds. These include:
- Being diagnosed with COVID‐19
- Having a spouse or dependent diagnosed with COVID‐19
- Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID‐19
- Lack of childcare because of COVID‐19
- Having a job offer rescinded or a job start date delayed due to COVID‐19
- Experiencing adverse financial consequences due to an individual or the individual’s spouse’s finances being affected due to COVID‐19
- Closing or reducing hours of a business owned or operated by an individual or their spouse due to COVID‐19
Additional considerations for taking an early distribution or loan:
- COVID‐19 distributions do not require any federal taxes to be withheld but are subject to tax at an individual’s effective tax rate. Make sure, if you do not have any taxes withheld, to budget for tax owed when you file your form 1040.
- If you decide to redeposit the distribution within 3 years to a retirement plan account, you will need to amend any prior year filings that you reported the distribution as taxable. If you tax the distribution over 3 years, it could mean amending 3 years of returns including federal and state returns.
- If you have access to bank loans, it may be cheaper take a loan rather than tap your retirement plan account as you will miss out on stock market gains, especially if you experienced serious losses in the COVID‐19 crash. After the COVID‐19 crash, most indexes rebounded and gains have wiped out most of the losses.
The CARES Act also waived Required Minimum Distributions (RMD) for 2020. This impacts anyone born prior to July 1, 1949 and most non‐spousal heirs who inherited tax‐deferred accounts. If you already took an RMD for 2020, you have until August 31, 2020 to put the RMD funds back into your account.
Provisions Aimed at All Individuals
The CARES Act provides for an above the line deduction for cash contributions of up to $300 for individuals who do not itemize deductions, but rather take the standard deduction. It should be noted that there is no expiration date associated with this provision, which means it stands a good chance of being applicable for future years.
The CARES Act allows an employer to pay up to $5,250 annually towards an employee’s student loans with the payment being excluded from the employee’s income. The provision applies to any payments made on behalf of an employee after the date the CARE Act was enacted through December 31, 2020.
The CARES Act provides for payments of $1,200 to individuals with Adjusted Gross Income (AGI) up to $75,000 and joint filers up to $150,000 of AGI and who are not dependents of another taxpayer. Additionally, eligible individuals can receive $500 for each child that qualifies as a dependent. Individuals in higher tax brackets receive a reduced rebate that is phased out at AGI’s exceeding $99,000 for individuals, $146,000 for head of household filers and $198,000 for joint filers. These payments are not taxable to the taxpayer. If eligible to receive the payment and you do not receive it before yearend, you will receive it as a credit on your 2020 form 1040 filing.
As you can see, there are several provisions, which may be a help to individuals depending on their circumstances. Not sure where to turn? Whether you just have a question, need clarification or advice, or need your taxes prepared, feel free to drop me a line. I am available via email at Briand@hobe.com or via email@example.com. I am also available by phone at (216) 524‐8900 extension 230.