Current Thinking

The CARES Act and Your Retirement Plan

The $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law on March 27, is designed to provide much-needed economic relief to individuals and businesses adversely affected by Coronavirus (COVID-19).

But what everyone might not know about CARES is that it also provides relief for both sponsors and participants of retirement plans.

CARES waives the additional 10% penalty tax on early (pre-age 59 ½) withdrawals up to $100,000 from a retirement plan or Individual Retirement Account (IRA) for qualified individuals. While those distributions are still subject to income tax, they can be included proportionally in the qualified individual’s taxable income over a three-year period, unless the individual elects to have it taxed in the year of distribution. 

In addition, the distribution will not be treated as an eligible rollover distribution, so the otherwise mandatory 20% withholding tax does not apply.

And while individuals who are aged 72 usually must take a Required Minimum Distribution (RMD) from their defined contribution (DC) plans and IRAs, the Act waives RMDs for calendar year 2020 for DC plans, including 401(k), 403(b), 457(b) and IRAs, thus allowing individuals to keep funds in their retirement plans.

Some have expressed fear that they will be “on the hook” for two RMDs in 2021, but that is not the case: Instead, the 2020 RMD has essentially been eliminated.

CARES also allows a qualified participant to borrow up to 100% of his or her vested account balance or $100,000, whichever is less, as long as that loan is made between March 27 and September 22, 2020.

A couple of notes are necessary here: Some sources have said the closing date is September 23, 2020, which adds to some of the confusion surrounding what CARES does and does not do. It is also worth keeping in mind that not all retirement plans allow for participant loans, so be sure to check before planning your short-term financial future.

And, as always, consult with a tax professional when taking a distribution or loan from your retirement plan, and for more details on how it may impact your individual financial circumstances.

But can a company whose retirement plan does not currently provide for loans amend the plan so that it does – in order to further help its employees weather this storm? We say absolutely, yes. The spirit of the law is to make it easy for plan sponsors to get money into the hands of those in need.

Others argue that to enact such changes, formal amendments must be made. Under normal circumstances, we agree – but these are not ordinary circumstances. Obviously, paperwork is needed – but you do not need to amend your underlying plan document right away: You have 180 days as of March 22.

Such arguments are counterintuitive and not within the spirit of the law. Discussing, drawing up, and signing off on plan amendments can be a time-consuming (not to mention costly) process – and these are loans that are needed now.

We maintain that the process of getting money into the hands of those qualifying individuals who truly need it should be easy.

So what “qualifies” an individual to take COVID-19-related distributions and/or loans? He or she must:

  • Be diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC).
  • Have a spouse or dependent diagnosed with COVID-19 by a test approved by the CDC.
  • Experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, or closing or reducing hours of a business owned or operated by the individuals due to the virus.
  • “Self-certify” that you have met one of these conditions.

Lastly, although it is fast becoming a cliché, we truly are all in this together. Pentegra is here to help – please feel free to contact our team at 800-872-3473 or at

About the Author

Richard Rausser

Richard W. Rausser has more than 30 years of experience in the retirement benefits industry. He is Senior Vice President of Thought Leadership at Pentegra, a leading provider of retirement plan and fiduciary outsourcing to organizations nationwide. Rich is responsible for helping to shape and define Pentegra’s viewpoint on workplace retirement plans, plan design strategy, retirement success and employee savings trends. His work is used by employers, employees, advisors, policymakers and the media to produce successful outcomes for American workers.  In addition, Rich is responsible for Pentegra’s Defined Benefit line of business, which includes a team of Actuaries and other retirement plan professionals as well as Pentegra’s BOLI line of business.  He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College.