CARES Act Brings Relief, New Options for Business Owners
Easing of Retirement Plan Distributions for COVID-19 Provides Financial Alternatives
The federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law in late March eased several rules to allow for 2020 emergency distributions from IRAs, employer-sponsored retirement plans — or both — for people directly affected by COVID-19, including small-business owners. If affected by the pandemic, these sweeping changes could provide a critical source of stopgap aid for you or your employees, if you are a business or health-care practice owner with a retirement plan.
Are You Eligible?
First, find out if your practice or employer’s retirement plan is offering these concessions, as they are not required. To be eligible for a coronavirus-related distribution (sometimes referred to as a CRD) from a retirement account before age 59 ½ without a tax penalty under the act, you must meet the following criteria:
- Be diagnosed with COVID-19
- Have a spouse or dependent diagnosed with COVID-19
- Experience a layoff, furlough, reduction in hours or inability to work due to the virus, or lack of child care because of it
If eligible, up to $100,000 in total can be withdrawn from all your retirement accounts in the calendar year, but remember it is taxable eventually. The CARES Act suspends the 10% early withdrawal penalty and 20% federal withholding that usually would apply to distributions from a 401(k) or other workplace retirement plan if you haven’t yet reached 59 ½. (There is no withholding on early withdrawals from IRAs.) The money taken must be repaid into a retirement account for up to the next three years, and will be reported as taxable income over the same period, although interest is suspended. It can be returned to the account gradually, or in a lump sum.
Tip: We suggest recognizing the full amount in a lower-income year (such as 2020, if you’ve had economic setbacks) for tax purposes, a move that also adds simplicity to the payoff.
For practice or small-business owners in need of payroll, rent or other financial assistance to weather COVID shutdowns, the federal Paycheck Protection Program (PPP, see our blog post) and the subsequent Paycheck Protection Flexibility Act (H.R. 7010 or “PPFA,” read more in blog post) signed into law on June 5 provide further critical assistance, including some loan forgiveness, to practice owners with a payroll. The PPP application deadline is June 30, for those who have yet to apply.
Plan Loan Limits Raised
As another possible financial lifeline, the CARES Act further relaxed limits on loans from employer retirement plans that permit them and are participating in CARES Act initiatives. Plan loan limits also were doubled to $100,000 (or 100% of the participant’s vested amount in the plan) for loans taken between March 27 and Sept. 23, 2020; repayment may be delayed up to one year after the loan is obtained. So the normal five-year payback period for these COVID-related plan loans can stretch until 2026, but interest still accrues in 2020. As usual, plan loan interest rates are specific to each retirement plan, but must be reasonable by law.
Tip: Strict payback periods for these loans may apply, and your employer or plan custodian may require full repayment if your job is terminated.
Speak with a Financial Professional
The CARES Act delivered many changes, including swift easing of longstanding rules for retirement plan withdrawals and distributions. Looking to discuss the CARES Act, or another financial topic? Schedule a complimentary consultation with Altfest.
Opinions expressed herein are solely those of Altfest Personal Wealth Management, unless otherwise specifically cited. Material presented is believed to be from reliable sources, but not representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.