Your Practice and the Coronavirus Aid, Relief, and Economic Security (CARES) Act

Editor’s Note: to read Eileen’s more recent post on the CARES Act, click here.

It is with a heavy heart I am writing this post. Although I try to instill humor into otherwise dry (or so I’ve been told) subject matter, these days are no laughing matter.

In recognition of these profoundly desperate times, I want to make sure my clients (domestic relations attorneys) are armed with the most precise information when their own clients come to them with questions on how Title II of The Coronavirus Aid, Relief, and Economic Security (CARES) Act may temporarily affect retirement account division in divorce and QDROs, especially with many courts being forced to close or work with a skeleton crew.

CARES Act - Special Rules for Retirement Plans

The basics of the CARES Act as it relates to retirement plans are as follows, for eligible plans (e.g., 401(k), eligible 457(b), qualified 403(b), IRA), and eligible participants (those impacted by COVID-19, as broadly defined under the CARES Act at Section 2202 (a)(4)(A)):

• A plan may permit a “coronavirus-related distribution” of up to $100,000 through 12/31/2020, and--

  • The distribution will not be subject to early withdrawal taxes if under 59½ (if made on or after 1/1/2020 and before 12/31/2020) [Section 2202 (a)(1)]

  • The distribution can be repaid (to the extent an eligible rollover distribution) over three years, without impacting maximum contribution limits [Section 2202 (a)(3)]

  • The income tax associated with the distribution (to the extent not repaid) may be paid ratably over three years, beginning with taxable year 2020 [Section 2202 (a)(5)]

  • The mandatory 20% withholding will not apply [Section 2202 (a)(6)]

• A plan may permit loan limit increases up to $100,000 (or 100% of the vested balance, if the lesser) made within 6 months from the CARES Act effective date, and--

  • 2020 repayments may be delayed for a year [Section 2202 (b)(2)]

  • For eligible participants the extension rule applies to any repayments (including for loans already outstanding) through 12/31/2020 [Section 2202 (b)(2)]

• Required Minimum Distributions (RMDs) are discontinued for the remainder of 2020 [Section 2203 (a)]

To the extent an eligible plan will provide a distribution or increased loan under the provisions of the CARES Act, the plan would need to adopt amendments to the plan document. However, such amendment would not have to be adopted until the end of 2022 (exceptions apply, for instance for government sponsored plans). [Section 2202 (c)]

The IRS is expected to provide guidance regarding the retirement-related provisions of the CARES Act, which will be available on the IRS.gov website – see Coronavirus Tax Relief.

The Bottom Line for Family Law Attorneys

• My opinion is that the overall impact of the CARES Act itself as to pending divorce cases and post-decree matters may be limited because: 1) the rules are temporary, 2) any increased amounts permitted for distributions and loans are not without limitation or caps, and 3) plans are not required to increase the limits for otherwise permitted distributions and loans, but the CARES Act provides the flexibility for plans to do so.

  • Thus, the CARES Act may not (in practical effect) create any significant new opportunities or incentives for a plan participant to withdraw from their account while the divorce case may be on hold or delayed. Also, keep in mind, some plans already allowed in-service distributions without limitation, and most plans already allowed loans up to $50,000 (or 50% of the vested balance, if the lesser).

  • Moreover, many plans will not have the financial means to ultimately amend their plan documents in order to offer temporary reprieve under the CARES Act, and likewise, the administrative burden of implementation (for instance with repayment rules) may be impracticable and cost prohibitive.

• The impact of access to the courts during the COVID-19 pandemic is an issue.

  • But not because delays could work to effectively deny a non-account owning spouse their own rights under the temporary rules of the CARES Act. The non-account owning spouse is already afforded many of the same rights under the QDRO rules, i.e., right to a distribution and waiver of the early withdrawal taxes if under 59½; and a non-account owning spouse would rarely be able to take advantage of loan provisions, even when such are permitted by a plan regardless of the CARES Act.

  • The key here is that even in ordinary circumstances, the timing of the entry of a QDRO is crucial. For instance, a non-account owning spouse cannot accept a distribution of funds from an eligible plan without a plan approved QDRO, which must first be entered by the court. Also, in the event of the account owning spouse predeceasing the non-account owning spouse, a QDRO ensures payment to the non-account owning spouse. In extraordinary circumstances, such as we are in, a QDRO also provides the non-account owning spouse the means to direct their own investments, which is especially critical in a turbulent market.

  • On the other side, for the account owning spouse, some courts have local rules that effectively restrain the account owning spouse from withdrawing retirement until the court otherwise orders, or a decree is issued (or beyond issuance of a decree, with a pending-QDRO in limbo, an account owning spouse may be under continuing order). Although this makes sense in ordinary circumstances, in extraordinary circumstances, where the courts are facing unprecedented delays, the result may have a chilling effect on an account owning spouse’s ability to inure any benefit under the CARES Act, in the event their plan does opt-in.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act [<Click here to read the Act in full]

Blog Posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.