COURTESY / LEBEL & HARRIMAN LLP
Nate Moody is a retirement investment counselor and analyst at Lebel & Harriman LLP in Falmouth.
May 8, 2020
How to navigate CARES Act changes in retirement plan withdrawals
By Nate Moody
The CARES Act includes well-publicized provisions that provide direct funding and aid to businesses and individuals, but there is a lesser known piece specific to retirement plans and accounts.
The bill significantly liberalizes the distribution options available to plan participants, or employees, subject to approval from plan sponsors, or employers.
As of April 17, less than three weeks after the provisions were adopted, $2.3 billion in CARES Act-related distributions had been processed at Fidelity, the nation's largest record keeper, for more than 160,000 participants.
With 96% of employers deciding to adopt the provisions, mostly to ensure flexibility for their employees during these uncertain times, what can you do to avoid a run on your retirement plan?
- Potential tax consequences.The CARES Act allows for Coronavirus-Related Distributions (CRDs) to avoid the usual 10% early withdrawal penalty as well as the usual 20% federal tax withholding. While employees are allowed to pay the distribution back, it will require amending their tax returns and may be challenging to afford. If not paid back and with no federal tax withholding, employees may have a larger-than-normal tax bill in the future.
- Loss of potential earnings. By taking a distribution or a loan, that money is no longer invested, and participants may lose out on any potential market returns or compounding interest effect.
- Loss of potential savings. Often when paying back a retirement plan loan and/or a withdrawal, participants will stop their usual contributions in order to afford the repayment. By doing this, employees could drastically reduce their potential future retirement savings and might also miss out on any employer match, if your company offers one.
It is common for employers to fear being too paternalistic when guiding participants on their options, especially when it comes to their own savings, and we certainly recognize that the coronavirus is affecting each and every one of us in its own unique way. That being said, we also still want to make sure to keep individuals aware of any consequences that might come from making an emotional or hasty decision during these times.
Plan sponsors should not have to handle this conversation on their own. Managing a retirement plan is a team effort. By having strong advisor and record keeping partners to lean on, employers can help educate and engage their workforce so that they can weigh the potential consequences and make informed decisions.
Nate Moody is a retirement investment counselor and analyst at Lebel & Harriman LLP in Falmouth. He can be reached at nmoody@lebelharriman.com.
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