April 13, 2020
By Jennifer McCahill, CPA, Partner
Individuals and organizations are looking for ways to gain access to cash during this time of financial and economic uncertainty. As Congress and the Administration discuss additional aid packages, we are seeing changes to the traditional regulations that would allow individuals and organizations to access funds through retirement plans. There is many factors to consider before accessing cash from a retirement plan, but understanding the options available to you is the first step.
Options for Individuals
As part of the CARES Act, the $2 trillion economic recovery package signed by President Trump on March 27, individuals may tap into retirement funds through the following options:
Early Withdrawal
If you are under 59 ½ years of age, typically you cannot take money out of your retirement plan without paying a 10% early withdrawal fee. Under the CARES Act, the 10% fee will be waived through the end of the 2020 calendar year on the first $100,000 of funds that you withdrawal from your retirement plan or IRA. However, this is still considered income to the individual, so you will be subject to income taxes on the withdrawal. The default for reporting this income is to spread it over a 3-year period for tax purposes. However, you can also elect to report it all in the same year and pay taxes that year.
Loans from a Qualified Employer Plan
If you have a qualified employer plan that allows for plan loans, under the CARES Act you are permitted to take a loan up to $100,000 (previously limited to up to $50,000) or 100% of their vested balance. Loans are permitted within the 180 days following the enactment of the law (March 27, 2020). Additionally, for anyone with outstanding loans as of March 27, 2020, repayments on the loan are delayed for one year. This, in turn, extends the loan repayment period by an additional year, but it does not waive payment altogether.
Waiver of required minimum distributions
Additionally, minimum distributions from defined contribution retirement plans are not required in calendar year 2020.
If the employer does not wish to incorporate these changes, they need to contact their third party plan administrator immediately. Otherwise, some financial institutions will begin processing distributions in the next couple of weeks. The employer is also required to update their plan document for these changes. The plan must be amended no later than the last day of the first plan year beginning on or after January 1, 2020 to reflect how the plan was operated during this time.
Options for Employers
As employers evaluate various ways to improve their cash flow during this time, they have raised questions about how they can reduce or eliminate employer contributions.
Safe Harbor Plans
While safe harbor plans tend to be more restrictive and limit the employer’s ability to reduce or stop contributions altogether, there are still some options. The employer should check their plan document to see if it currently allows the suspension of contributions during the year, for any reason. If your plan allows for the suspension of contributions, you can move forward with this option but you will still be required to meet the requirements of your discrimination testing.
If your plan document is silent about the option to suspend contributions, IRS regulations allow you to drop or reduce contributions only if your business is losing money. If this is the case and you choose to proceed with suspending contributions, your organization must notify employees at least 30 days before taking action and amend your plan document accordingly. In addition, the organization will still be required to pass discrimination testing.
Non Safe Harbor Plans
Without a safe harbor provision, your organization may have an easier time suspending employer contributions to the retirement plan. Start by reviewing your plan document to determine whether it permits suspending contributions. If not, you have the option of amending your plan accordingly. In addition, just like the safe harbor plans, you will still be subject to passing the discrimination testing.
While there are a number of options available to individuals and employers, investment advisors are generally advising clients to weather the storm and continue to invest with a long-term strategy in mind. No matter which options you choose to explore, consult your CPA, attorney, investment advisor and third party plan administrator to consider all factors and determine the most favorable course of action.
For more information, contact Jennifer McCahill, CPA, Partner at jmccahill@grfcpa.com or 301-951-9090.
