The CARES Act passed by Congress in April has several different provisions that affect retirement plans like pensions and 401k benefits. Whether you are still employed, or now out of work, this article will try to help you understand the possibilities.
I’ve been laid off in the emergency, and I don’t have enough money to cover my bills. Can I tap money from my 401k retirement savings to get through the crisis?
Yes. Under the Cares Act, individuals with money in a 401(k) plan may withdraw up to $100,000 from their 401(k) to meet their financial needs during this crisis without an immediate tax penalty. If you pay the full amount back to your 401k within three years, there will be no tax imposed at all.
Normally, there are two bad things that happen when you withdraw money from a 401k (or 403b) before the age of 59½. First, 20% of the amount will be sent by the financial institution to IRS as prepayment of income tax owed on the money you withdrew. Second, another 10% of the amount is simply paid to the IRS as a penalty. IN normal circumstances the point is to encourage you to leave your money in the account to build up for your retirement. In normal circumstances, if you take money out you take a big hit for income tax and the ten percent penalty.
Under the CARES Act, both of these “disincentives” are suspended. First, you can withdraw money from your 401k/403b with no penalty at all. Second, there will be no immediate tax withholding. Taxes due on the money you withdrew will be spread across your next three tax returns. BUT if you repay the full amount back to your 401k/403b plan within three years, then there will be no income tax liability at all.
Although the CARES Act makes this possible without a penalty, it is not necessarily a good idea. Most financial planners say taking money early from your retirement account should be the absolute last resort. If you can possibly avoid taking this step, you will be better off in the long run.
Are there specific conditions I have to meet to be able to withdraw money from my 401k/403b plan without penalties?
Yes. Coronavirus-related distributions can be taken only for the following reasons:
- You, your spouse or dependent has been diagnosed with the coronavirus.
- You’ve experienced adverse financial consequences as a result of being quarantined, furloughed or laid off, or your work hours have been reduced.
- You’re unable to work because of a lack of child care.
- You’ve had to close or reduce the hours of a business as a result of the virus.
- You’ve been financially impacted by other factors determined by the treasury secretary.
I’m still working and contributing to my 401k/403b retirement plan, but my employer is in deep financial trouble. Can my employer hold onto my contribution instead of sending it to the 401k/403bplan?
No. The money you contribute, taken out of your wages and earnings, is your property. Your employer is legally obligated to send your contributions to the 401k/403b plan. If your employer takes a retirement plan contribution out of your paycheck without putting it into your 401(k) account in a reasonable time, your employer is violating the law.
I’m still working and contributing to my 401k/403b retirement plan. However, my employer says it won’t be making its “match” payment during the coronavirus emergency. Can they do that?
Probably. The CARES Act may allow employers to stop making “employer matching contributions” during the coronavirus epidemic. (As we just explained, though, the employer must send your contributions to the 401k/403b plan.) This depends partly on what the company’s “benefit plan” says; whether you have a “contract” with the company for it to make contributions; and some other complicated legal rules. But in general, the CARES Act does make it easier for employers to stop making “matching contributions.”
I am retired and receiving monthly payments from my private pension plan. Does the CARES Act make any change to my payments?
No. If you have qualified for pension payments, the pension fund is legally obligated to make the payments. The CARES Act did not change this.
The CARES Act may allow an employer to postpone the payments it makes TO the pension plan during the COVID-19 emergency, but this is only a temporary measure. It does not change your right to receive the pension benefits you have earned by your previous work.
am retired and over age 70. Do I have to take “Required Minimum Distributions” during the COVID-19 emergency?
No. The CARES Act suspends the minimum withdrawal requirements during the coronavirus emergency.
I am still working, and my employer has a private pension plan. But it looks like the employer will be going out of business, or may just shut down the pension plan. Will I lose the pension benefits I’ve earned?
No. If a business has to close down, or has to close a pension plan, the CARES Act provided a back-up. The federal Pension Benefit Guaranty Corporation provides pension “insurance” to participants, to pay benefits if the pension plan is closed or goes bankrupt.
What if I am covered under a government-funded pension plan?
Pensions provided by most state governments are protected by statute or the state constitution and should be unaffected at this time.
What about military benefits?
Like government funded pension plans, military pensions should be unaffected at this time.