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Somewhat Succinct Summary of the CARES Act. Part II Thumbnail

Somewhat Succinct Summary of the CARES Act. Part II

Markets & Economics Personal Finance

Part II - Effects on Retirement Accounts and Taxes

By Jon Aldrich

As promised in the first installment of the Somewhat Succinct Summary of the CARES Act, here is the sequel you have all been waiting for. But first, I mentioned in my last article, the unprecedented jump in initial unemployment claims last week to 3.3 million people filing, which was the largest ever seen. Well, this morning the preliminary tally came out for the week of March 22-28, and the number doubled the 3.3 million figure from last week, coming in at 6.6 million! This brings the 2 week total to just about 10 million people out of work. Truly staggering at how quick the economy has seized up due to COVID-19.


This installment is going to focus on the provisions that affect retirement plans and income taxes. Going to do my best to keep it simple, but if you really want to dig into the details, I suggest checking out the Nerd’s Eye View.

Required Minimum Distributions (RMD’s) from IRAs Waived for 2020

I believe the last time RMD’s were waived was during the Great Financial Crisis for calendar year 2009. In 2020, a totally different crisis has prompted the government to waive the RMD for 2020. They will have to wait another year to collect those tax revenues. Here are some key points regarding this:

  • This also includes amounts from Traditional IRAs, SEP IRAs, and SIMPLE IRAs. It also applies to 401(k), 403(b) and Governmental 457(b) plans.
  • Voluntary distributions are still allowed. Thus, if someone depends on the amounts from their IRAs, nothing changes.
  • Qualified Charitable Deductions (QCD’s) for those 70 ½ and older are still available for those that wish to continue to support charitable organizations. So even though there is no RMD to offset, the QCD can still be completed, much to the relief of many charities that are likely going to be strapped for cash.
  • For those that may have already received their RMD for 2020 there are a couple of options if they want to return it to the IRA or 401(k).
    • If it has been less than 60 days since the amount was received, they can simply write a check back to the account.
    • For those that took their RMD very early in the year and the 60 day window has expired they might be able to qualify under the “Coronavirus-Related Distribution” provision which I will discuss next and a rollover back to the account could occur anytime over the next 3 years.
    • For those with inherited IRA’s that already received their RMD, they are out of luck as there is no provision for the beneficiary of an inherited IRA to return funds received back to the IRA.
  • We will soon be contacting our clients that receive RMD’s and discussing their RMD options for 2020.

Coronavirus Related Distributions

Normally if you take distributions from an IRA or employer sponsored plan such as a 401(k), 403(b), etc. and you are under age 59 ½ you are subject to a 10% penalty and mandatory Federal withholding of 20% of the amount distributed to you. But with the Coronavirus Related Distribution provision of the CARES Act the following applies:

  • Exempt from 10% Penalty
  • Not subject to 20% Mandatory Federal Tax Withholding – but Federal and state income taxes still apply
  • Eligible to be paid back over 3 years. If paid back, you would file amended tax returns to claim a refund of the additional tax owed due to the distribution
  • Can spread the income out evenly over 3 years for tax purposes over 2020,2021 & 2022

Ok, so how do you qualify for the Coronavirus Related Distribution if you need the funds:

  • Have been diagnosed with COVID-19
  • Have a spouse or dependent who has been diagnosed with COVID-19
  • Are experiencing adverse financial consequences due to being quarantined, furloughed, laid off or reduced work hours due to the virus.
  • Are unable to work because you lack childcare as a result of COVID-19
  • Own a business that has closed or is operating under reduced hours because of the pandemic.
  • Meet some other reason that the IRS decides is OK.

Increases to Amount of Loans From Employer Sponsored Retirement Plans

This applies to employer sponsored plans such as 401(k)s or 403(b)s that offer participants to take a loan against their retirement account and pay themselves back over time through payroll deductions. NOTE: This only applies to those that qualify for the Coronavirus Related Distribution above.

  • Increases Max loan amount to $100,000 – previously the maximum amount that could be borrowed was 50% of the vested balance or $50,000.
  • Can now borrow up to 100% of vested balance.
  • Re-payments delayed – any payments owed on the loan from date the loan begins through the end of 2020 can be delayed up to one year.
  • If a plan does not currently have a loan provision, that does not change unless the plan sponsor amends the plan document to allow loans.

So, previously a participant may have had a $100,000 vested balance in his account but could only borrow up to 50% or $50,000.  If they qualify under the rules above, they would be able to borrow up to 100% of their vested balance or $100,000.

As it stands now, if the loan is never paid back, say because that person loses their job, the same rules apply and it would be considered a taxable distribution. So caution should be used.

Income Tax Filing and Estimated Tax Date Changes:


Tax return filing and payments of any amounts due for income, estate and gift tax returns are delayed from the usual April 15 deadline to July 15. There is no late payment or interest accrued during the 3 month extension. If you owe money, you are getting a 3 month reprieve from Uncle Sam. Most, but not all states have moved their deadlines as well. You can check here to see if your state has a heart or not.

For those that pay quarterly estimated tax payments and are accustomed to making the first installment on April 15th, can now make the first installment July 15th, with no interest or penalty accruing. The funny part of all this is that the 2nd quarter installment is still due on June 15th so the 2nd quarter estimated tax payment will actually be due before the first quarter. Strange days indeed. You will also want to check to see what your state’s quarterly tax payment schedule is, as some of them do differ from the Federal version.

The deadline for making your 2019 IRA or Health Savings Account (HSA) contributions has also been extended to July 15th.

Medical Spending Accounts Can Now Purchase Over-The Counter Drugs

Flex Spending, Health Savings Accounts and Medical Spending accounts are now allowed to purchase over-the-counter and not just prescription drugs for the rest of 2020 and in future years from what it looks like in the Act. You can now purchase aspirin, cold medicine, and other items with your Medical Spending Accounts. This is the way the accounts operated several years ago until the laws were changed.

New $300 Above-The-Line Charitable Deduction

This one is not a big deal, but it is a little bit of a help to most taxpayers. Since most taxpayers are not itemizing deductions anymore because of the recent tax law changes, the CARES Act provides for a $300 charitable deduction that is available to those that do not itemize deductions, which is approximately 90% of taxpayers. Above-the line- means that it reduces you adjusted gross income (AGI) on your tax return.

Student Loans

  • Student Loan Payments Deferred Until September 30, 2020.
    • No interest will accrue on the debt
    • Can still make voluntary payments
    • Loan term would just be extended, however, those that wish to continue making payments are essentially paying down a 0% loan
    • If you are in a profession where you will eventually receive loan forgiveness, you definitely do not want to make payments during this time.
  • Employers Can Exclude Student Loan Repayments from Compensation
    • Through the end of the year, employers can provide employees up to $5,250 for purposes of student loan payments and be excluded from the employee’s income. Normally, these would be included in the employee’s income.
    • This amount would have to be coordinated with the $5,250 allowed by employers as tax-free education assistance.

I did my best to summarize in as few words as possible, but there is a lot of “stuff” in the CARES Act and we have not even made it to the Small Business related items. Hope to do so soon.