Connections for Success



CARES Act Expands Financial Options for Impacted Plan Participants
James Pellino

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed a few weeks ago in an effort to help curb the possible economic stress the Coronavirus pandemic has placed on Americans. The Act was far reaching and included many provisions regarding retirement plans and accounts. Although guidance on the CARES Act continues to come out and the possibility of additional legislation is very probable, here is what we know now about how the CARES Act has affected participants’ ability to tap into their retirement accounts.

Early distributions

The CARES Act allows participants under age 59½ to take out up to $100,000 from their 401(k) plans in 2020 without incurring the 10% early distribution penalty, subject to certain restrictions. Multiple distributions can be taken so long as the total amount (including distributions from other plans and individual retirement accounts) does not exceed $100,000.

The distributions are subject to regular income tax. However, the Act does allow taxpayers to defer payments over a three-year period. There is also no requirement for the participant to withhold taxes on the distributions.

Eligibility for early distributions is limited to “qualified individuals,” as certified by the participants themselves. Unlike hardship distributions, plan sponsors do not need to obtain proof that the participant is a qualified individual, but we do suggest that the third-party administrator (TPA) reaches out to the plan sponsor before any distributions are made to approve that the plan will adopt this provision. 

A qualified individual generally is someone who:

  1. Has been diagnosed with the virus using a test approved by the Centers for Disease Control and Prevention (CDC); or
  2.  Has a spouse or dependent with that diagnosis.

In addition, participants who experience adverse financial consequences as a result of being quarantined, laid off, having their work hours reduced, closing of business or taking time off due to lack of childcare are also qualified individuals.

Participants can return distributions to their retirement plan accounts within three years from the date of receiving the distributions. Whatever distributions they do return within the time limit will be treated the same as a trustee-to-trustee rollover distribution and not be subject to income tax. Sponsors must keep careful records of each distribution’s timing and repayment timing (if that happens) to ensure that the three-year limit is satisfied.

Plan loans

As an alternative to distributions, the CARES Act also allows participants to take larger loans that were previously allowed. Specifically, the limit is the lesser of:

  1. $100,000; or
  2. 100% of the value of the participant’s vested account balance.

These larger loan amounts must be issued within 180 days of the CARES Act’s March 27, 2020, enactment.

In addition, participants with existing loans may delay payments due from the Act’s enactment through December 31, 2020. Additional interest will accrue on the delayed payments.

Breathing room

Plan sponsors can take advantage of the CARES Act provisions immediately, but must amend their plan documents. Plan sponsors have until December 31, 2022 to amend their plan (assuming a calendar year-end plan).  As stated above, please keep in mind that further regulations or legislation could affect these distribution and loan rules. We will continue to send updated blogs as new legislation comes out.

Related Read: IRS Provides Additional Required Minimum Distribution Relief for Taxpayers Affected by the Coronavirus Pandemic

For more information, contact Jim Pellino at [email protected] or 312.670.7444. Visit to learn more about our Employee Benefit Plans Services.

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