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CARES Act Impact on Retirement & Tax Planning

On March 27, 2020, President Trump signed into law the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) to protect and support American businesses, hospitals, and individuals in response to the faltering U.S. economy. Several provisions in the CARES Act affect retirement and tax planning, including implications for required minimum distributions, 401(k) loans, distribution exceptions, Social Security benefits, and charitable giving. The following is a summary of these key provisions:


> Waiver of required minimum distributions (“RMDs”) – The Act waives RMDs for 2020 from retirement accounts, including IRAs, 401(k)s, inherited IRAs, 403(b)s, and 457(b)s. This enables retirees to keep their funds invested rather than having to withdraw money during this time of market turbulence and economic uncertainty.

> Expansion of 401(k) loans in two ways:

1) Many 401(k) and other defined contribution plans permit participant loans of up to the lesser of $50,000 or 50% of the vested account balance. The CARES Act increases the loan limit to the lesser of $100,000 or 100% of the vested account balance. This provision applies to loans made between March 27th and September 23rd of this year.

2) Furthermore, the CARES Act gives people an extra year to pay back their loans if 2020 was one of the five years for their outstanding loan repayment, essentially creating a six-year repayment period with no more payments due in 2020. Please note that you should confirm with your plan provider before assuming that these provisions apply to you.

> COVID-related distribution exception – “Qualified Individuals” (see definition below*) may receive up to $100,000 of their vested account balance without incurring penalties, even if they are younger than age 59 ½.

- Participants have the option of pro-rating the amount of the distribution included as taxable income over a 3-year period, and distributions may be repaid to the plan (or other qualified retirement plan or IRA) within a 3-year period.

- The $100,000 is cumulative across all plans offered by an employer or members of a control group.

- 20% automatic tax withholding is not required.

> Social Security benefit for the self-employed – Typically, employers and employees pay a 6.2% Social Security tax for FICA taxes with a wage base limit of $137,700 in 2020. If you are self-employed, you are required to pay 12.4% as both the employer and the employee. The CARES Act permits employers and the self-employed to delay payment of the 6.2% employer tax until December 31, 2021, when 50% is due, with the remaining 50% due on December 31st, 2022.

> Higher limit for charitable giving - The CARES Act permits cash gifts to most public charities of up to 100% of adjusted gross income ("AGI") in 2020 versus the usual limit of 60% of AGI. Therefore, if you are expecting a large taxable event in 2020, such as the sale of a business, this could be a good time to take advantage of the one-time higher AGI limit for cash gifts.


Please consult with your tax advisor and employer/plan provider as appropriate for your specific circumstances.


* A Qualified Individual for is any participant who either:

- is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

- has a spouse or dependent diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19);

- experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease;

- being unable to work due to lack of childcare due to such virus or disease;

- closing or reducing hours of a business owned or operated by the individual due to such virus or disease; or

- other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).

Employers may rely on a participant’s certification that they meet the criteria of a Qualified Individual.

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