The Coronavirus Aid, Relief and Economic Security (“CARES”) Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748), became law on Friday, March 27, 2020. This memorandum provides an overview of CARES Act programs that may be applicable to our individual clients. If you are a business owner please contact us for additional firm publications as there are various small business assistance programs that may be applicable.
I. Individual Relief
A core component of the CARES Act is recovery rebates for individual taxpayers. All U.S. residents with adjusted gross income up to $75,000 ($150,000 for married taxpayers), are eligible to receive a $1,200 rebate ($2,400 for married taxpayers). Taxpayers will receive an additional $500 for each dependent child. The rebate amount is reduced by $5 for each $100 of adjusted gross income in excess of the above thresholds. That means that the rebate will be completely phased-out at the following thresholds: (i) adjusted gross income of $99,000 for single filers; (ii) adjusted gross income of $146,500 for head of household filers with one child; and (iii) adjusted gross income of $198,000 for joint filers with no children.
In determining the above thresholds, the IRS will use a taxpayer’s 2019 tax return, or, if unavailable, the taxpayer’s 2018 tax return. No action is required to claim the rebate. The rebate is not available for taxpayers who are claimed as dependents by other taxpayers.
II. Retirement Relief
In addition to the individual rebate program, the CARES Act includes a loosening of restrictions on loans and hardship withdrawals from qualified plans (e.g., 401(k)s and Individual Retirement Accounts (IRAs)).
A. Coronavirus-Related Distributions
The proposal applies to coronavirus-related distributions taken by individuals on or after January 1, 2020, and before December 31, 2020. Coronavirus-related distributions include distribution made to an individual:
- who has received a diagnosis of COVID-19;
- whose spouse or dependent has received a diagnosis of COVID-19; or
- who experiences adverse financial consequences, due to COVID-19, as a result of being quarantined; furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; closing or reducing hours of a business owned or operated by the individual; or other factors determined by the Treasury Secretary.
Coronavirus-related distributions are limited to aggregate distributions of $100,000 per eligible participant. With respect to such distributions the program:
- waives the 10% early distribution penalty under IRC Section 72(t);
- exempts the distribution from the IRC Section 402(f) requirements and mandatory 20% withholding applicable to eligible rollover distributions;
- permits the individual to include income attributable to the distribution over a three year period beginning with the year the distribution would otherwise be taxable; and
- permits recontribution of the distribution to plan or IRA within three years.
Plan administrators are permitted, but not required, to make available such coronavirusrelated distributions. Plan administrators may rely exclusively on an employee’s certification that the employee satisfies one of the above conditions to determine eligibility for a distribution.
B. Required Minimum Distributions
The calendar year 2020 required minimum distributions (RMDs) are waived for all types of defined contribution plans (e.g., 401(k)s and Individual Retirement Accounts (IRAs)). This also applies to RMDs due in 2020, but attributable to the prior tax year. The CARES Act does not directly address whether an individual who has already taken their 2020 RMD can roll back such funds. Such RMD rollback was permitted during the last RMD relief in 2009. We anticipate that such rollback will be permitted in 2020, but are awaiting further guidance from the IRS.
C. Qualified Plan Loans
The CARES Act also increases the maximum loan limit for qualified individuals. Qualified individuals include those persons who would qualify for a coronavirus-related distribution as described above. The loan limit has been increased to the lesser of:
- $100,000 (up from $50,000); or
- The greater of $10,000 or 100% (up from 50%) of the present value of the participant’s vested benefit.
The program is available during the 180-day period beginning on March 27, 2020. Payment due on such loans will be delayed for 1 year. The program also extends the due date of any qualified individual’s current loan repayment from a qualified plan that would otherwise be due during 2020. Such due date is extended to one year after the otherwise applicable due date.
III. Legal Advisory
This memorandum does not create an attorney-client relationship. This memorandum is intended to be informational and does not constitute legal advice regarding any specific situation.
If you have any questions about the CARES Act or your individual needs, please do not hesitate to contact us at (941) 954-4691.