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  • Diane Shenk

Coronavirus Aid, Relief, and Economic Security (CARES) Act

Updated: Jun 23, 2020

Important information:


Waiver of 10% Early Withdrawal Penalty

Under §72(t), distributions from a qualified retirement plan are subject to a 10% additional tax unless the distribution meets certain exceptions. However, CARES now provides that individuals are allowed to withdraw up to an aggregate amount of $100,000 from a qualified retirement account without the 10% penalty for early withdrawals for coronavirus-related distributions.


Note: Such distributions are subject to regular income tax but, it can be spread over three years.


Coronavirus-Related Distribution

A coronavirus-related distribution is any distribution (within dollar limits), between January 1, 2020, and December 31, 2020, from §402(c)(8)(B) retirement plans (i.e. employer-sponsored retirement plans and individual retirement accounts) to a qualified individual.


Qualified Individual

A qualified individual is any individual:

(1) diagnosed with the virus SARS-CoV-2 or with coronavirus COVID-19 by a test approved by the CDC,

(2) whose spouse or §151 defined dependent is similarly diagnosed, or

(3) experiencing adverse financial consequences as a result of being:

(a) quarantined,

(b) furloughed or laid off or having work hours reduced due to such virus or disease, or

(c) unable to work due to lack of child care due to such virus or disease, the closing or reduction of hours in a business owned or operated by the individual due to such virus or disease.


The eligible retirement plan administrator can rely on an employee's certification that the employee satisfies the conditions of item (3) above.


Repayments of Coronavirus-Related Distributions

A coronavirus-related distribution may, at any time during the 3 year period beginning on the day after the date such coronavirus-related distribution was received, be repaid in one or more contributions to an eligible retirement plan in which the qualified individual is a beneficiary. Such repayments will be treated as eligible trustee to trustee rollovers made within 60 days of distribution.


Temporary Waiver of RMD Rules

Under §401(a)(9), a retirement plan or IRA owner must take a required minimum distribution (RMD) annually once the owner reaches age 72. However, for calendar year 2020, CARES waives the required minimum distribution rules for certain defined contribution plans. The wavier applies to all required minimum distributions that would have been required in 2020.


Application

Pursuant to CARES, RMD rules do not apply in 2020 to:

(1) defined contribution plans (§403(a) or §403(b),

(2) defined contribution plans that are eligible deferred compensation plans under §457(b) and maintained by an employer, or

(3) individual retirement plans (§401(a)(9)(I)(i)).

In addition, the RMD rules do not apply to any distribution required to be made in 2020 because of:

(1) a required beginning date occurring in 2020, and

(2) Such distribution not having been made before 2020.


Loan Limits for Qualified Employer Plans

The limitation on loans (§4975(d)) from a qualified employer plan to qualified individuals during the 180-day period beginning on the date of enactment (March 27) is increased from $50,000 to $100,000 (or, if less, the individual’s nonforfeitable benefit). If the due date of a loan occurs between March 27 and December 31, 2020, it will be delayed for one year.


Employee Retention Payroll Tax Credit

CARES allows eligible employers to receive a 50 percent payroll tax credit up to $5,000 ($10,000 x 50%) per employee for qualified wages paid after March 12, 2020, and before January 1, 2021. If the credit amount exceeds the employer’s liability, the excess is refundable (§3111). The credit applies to wages paid after March 12, 2020, and before Jan. 1, 2021.


Eligible Employers

Employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings are eligible for the credit. In addition, eligible employers include those who have experienced more than a 50% reduction in quarterly receipts measured year-over-year.


Wages

Wages include health benefits and are capped at the first $10,000 in wages paid by the employer to an eligible employee. For employers with an average number of full-time employees in 2019 of 100 or fewer, all employee wages (including wages of those furloughed) are eligible. For employers with a larger average number of full-time employees in 2019, only the wages of furloughed or reduced hour employees.


Employer Payroll Tax Delay

Employers must withhold social security taxes (§3111(a)) on employee wages (§3211(a) & §3221(a)). Self-employed individuals are subject to self-employment (SECA) tax (§1401(a)).

Under CARES, taxpayers are allowed to defer paying the 6.2% employer share of the Social Security tax (but not the 1.45% employer share of the Medicare tax) through the end of 2020. The tax would be payable over the following two years with half paid by December 31, 2021, and the other half by December 31, 2022.


Applicable Date

The payment for applicable employment taxes between March 27, 2020, and January 31, 2021, won't be due before the applicable date. The applicable date is:

(1) December. 31, 2021, for 50% of employment and self-employment taxes, and

(2) December 31, 2022, for the remaining 50% of those amounts.

An employer is treated as timely making all deposits of applicable employment taxes required if all such deposits are made by the applicable date.


Net Operating Losses

Under §172, an NOL for any tax year is carried forward to each tax year following the tax year of the loss but cannot be carried back.

Under CARES, NOLs arising in a tax year beginning after Dec. 31, 2018, and before Jan. 1, 2021 can be carried back to the five tax years preceding the tax year of such loss (§172(b)(1)). In short, NOLs arising in 2018, 2019 and 2020 can be carried back to the five preceding years and can fully offset taxable income (§172).


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