This is an unprecedented time. We are here to answer your concerns about the effect of the Coronavirus on your retirement plan.
Participant loans are available to those who qualify. Loan payments are still due to the plan as scheduled. There is a cure period for loan payments that are not made in a timely manner. The cure period is one quarter following the quarter of the missed payment. So, if someone has to stop their loan payment in March 2020, their loan would not go into default until June 30, 2020. If they have to stop their loan payments in April, their loan would go into default September 30, 2020.
Layoff vs Termination
Unfortunately, being temporarily laid off from work is not an event that would allow for a distribution from the plan. A participant must be terminated in order for a distribution to be allowed. In addition, participants that are either terminated or temporarily laid off are not eligible for a loan because loan payments must be made through normal payroll deductions. Terminated participants are able to take a regular distribution. Generally, laid off employees can take a hardship distribution if they qualify and the plan allows them.
Many plans allow for in-service distributions when a participant attains a certain age, usually age 59 ½. These distributions would be available for those participants that exceed that age.
Many plans allow hardship distributions. These distributions are available to those who have an immediate and heavy financial need and no other way to satisfy that need (such as a bank loan). Typically, hardship distributions can only be taken:
- For medical expenses
- Purchase of a principal residence
- To prevent eviction or foreclosure
- Funeral expenses
- Tuition for post-secondary education
- Repairs due to a casualty loss
The proposed CARES (Coronavirus Aid, Relief and Economic Security) Act is widely believed to pass the House on March 27, 2020. The Act includes provisions that loosen the retirement plan hardship and loan rules to free up funds for those that are impacted by the Coronavirus pandemic.
It would waive the 10% penalty tax on early withdrawals for those impacted by COVID-19 up to $100,000 from a retirement plan or IRA. It would also allow those participants to pay tax on that distribution over a three year period and to repay the entire amount tax free back into the plan over three years.
The Act also could temporarily increase plan loan limits to a maximum of $100,000 or 100% of the vested account balance for 180 days.
The CARES Act also proposes that Required Minimum Distributions (RMDs) be waived for 2020. In addition, the act would allow the Department of Labor to postpone certain deadlines for filing requirements.
The Act would provide a one-year extension of time to repay a plan loan. It appears that the remaining payments would be reamortized over an extended period.
We'll keep you up to date as we learn more. Call us at 1-866-811-6604 with questions.