CARES Act Offers Short-Term Financial Relief via Tax-Favored Loans from Retirement

Certain individuals may be able to divert up to $100,000 from their retirement account, without penalty, to get through short-term hardship brought on by COVID-19.

Congress passed the CARES Act (think: those stimulus checks we’ve all heard so much about) on March 19 in an effort to provide emergency financial assistance for individuals, families, and businesses affected by the 2020 coronavirus pandemic.

However, lesser known portions of the CARES Act permit qualifying individuals to make up to $100,000 in tax-favored distributions and/or deferred loans from qualified retirement plans to deal with short-term financial issues.

So, who are qualifying individuals?

  • People who themselves, or their spouse or dependent, was or were diagnosed with COVID-19 or SARS-CoV-2; or
  • People who experience adverse financial consequences as a result of being quarantined, furloughed or laid off, or having work hours reduced, or being unable to work due to lack of child care, or closing or reducing hours at a self-employed business due to COVID-19 or SARS-CoV-2, or other factors as determined by the Secretary of the Treasury.

What is a coronavirus-related distribution?

  • If you’re a qualifying individual, you can take the distribution from your qualified plan between now and December 31, 2020. Any distributions taken prior to March 19, 2020, will not receive the tax-favored treatment described below.
  • You can re-pay all or any portion of a corona-virus related distribution to your qualified plan or an IRA at any time within three years of the date of distribution, with no taxes due on the amount re-paid.
  • Any amounts distributed but not repaid within the 3-year period may be included in the individual’s gross income for tax purposes in 2020, or ratably over a 3-year period beginning with 2020.

What is a coronavirus-related loan?

  • If you’re a qualifying individual, you must take the loan from your qualified plan within 180 days of the date of enactment of the CARES Act. Any loans taken prior to March 19, 2020, or following the 180-day window, will not receive the deferred payment(s) benefits described below.
  • Any loans repayments due between the date of the loan and December 31, 2020, shall be delayed for 1 year or later, and any subsequent repayments shall be appropriately adjusted to reflect the aforementioned delay, including any interest accruing during the delay.

If money is tight in your household due to the impact of the COVID pandemic, you should consider availing yourself of these benefits before the windows close on them.

Erik Arena is a divorce attorney who practices in Maryland and the District of Columbia. For more on tax-favored distributions and/or deferred loans from qualified retirement plans, contact him at 301-657-0725 or [email protected].