Crisis Relief: Financial Lifelines for Affected Workers
In the spring of 2020, unprecedented steps taken to help slow the spread of COVID-19 caused millions of Americans — including heavily impacted small-business owners and workers — to suffer a sudden and severe loss of income.
Congress quickly passed relief packages designed to ease some of the financial pain. The Families First Coronavirus Response Act (FFCRA) extends paid leave to affected workers at some small businesses. The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes temporary provisions that make it easier to access money held in tax-deferred retirement accounts.
Keep in mind that tapping retirement savings should generally be a last resort, as it may result in a financial shortfall later in life.
The FFCRA requires “eligible employers” with fewer than 500 employees to provide two weeks of paid sick leave to workers affected by COVID-19 (at 100% of usual pay, or two-thirds of usual pay if caring for sick family members or children). Workers with children whose schools or daycare centers are unavailable may receive an additional 10 weeks of family and medical leave (at two-thirds of usual pay). Employers (and self-employed workers) will be reimbursed with refundable payroll tax credits.
Distributions from tax-deferred retirement accounts such as 401(k)s and traditional IRAs are taxed as ordinary income in the year they are received, and withdrawals prior to age 59½ are normally subject to a 10% federal tax penalty (with certain exceptions).
The CARES Act waives the 10% early-distribution penalty for coronavirus-related retirement plan distributions up to $100,000 taken in 2020. These situations include a diagnosis of COVID-19 for account owners and certain family members; a financial setback due to a quarantine, furlough, layoff, or reduced work hours; an inability to work due to lack of child care; and in the case of business owners, the need to close or reduce hours as a result of the virus. The income can be spread evenly over three years for tax purposes, and all or some of the withdrawn amount can be reinvested within three years.
Many employer plans allow participants to borrow against their retirement savings and repay the money through salary deferrals. Normally, plan loans are limited to 50% of the vested balance or $50,000, whichever is less. For plan participants affected by the pandemic, the CARES Act increases the loan limit to $100,000, or 100% of the vested account balance if less, for loans taken out between March 27 and September 22, 2020.
Retirement plan loans typically must be repaid within five years (unless the money is used to purchase a primary residence). However, for qualified individuals who have outstanding loans, the CARES Act allows loan payments due between March 27 and December 31, 2020, to be delayed by one year.