CARES Act Part 4 - Retirement and HSA Provisions

By: Amy Irvine, CFP®, EA, MPAS®, CCFC

What is this?

  • Normally, if you are under the age of 59 ½ (unless an exception applies), you are subject to a 10% early withdrawal penalty from retirement distributions.

  • The CARES Act waives the 10% penalty for COVID-19 related distributions up to $100,000 from retirement plans (IF permitted by the plan) and IRAs.  

  • The distribution IS still taxable, just the penalty is waived.  This income, however, can spread out over 3-years.

  • The regulations also state that you can “make-up” these distributions over the next three years above and beyond your normal contribution limits.

  • NOTE: These are NOT considered hardship distributions, therefore the hardship rules do not apply

What is a COVID-19 Related Distribution?

  • A distribution in 2020 made to you IF you are diagnosed with COVID-19; OR

  • If you are quarantined, furloughed, laid off, have a reduction and hours, or unable to work because you have lost your childcare services.

What if I have a loan in my 401k?

  • Loan repayment may be deferred up to one year (check with your employer’s plan administrator to determine if interest will continue to accrue), IF you are a COVID-qualified individual (see above)

What if I want to take a loan?

  • Normally, the limits to a loan are 50% of your balance up to a maximum of $50,000

  • Under the CARES Act, this was increased to 100% of your balance up to a maximum of $100,000 for a qualified individual if made within 180-days of the March 27th enactment of the Act.

What if I am over 72 or in required minimum distribution (RMD) status?

  • You are permitted to skip taking your RMD this year

  • Inherited IRA’s also have this benefit

What if I already took the RMD?

  • We are awaiting further guidance on this but the normal rules for rollover currently apply.

I’ve heard I can fund my Health Savings Account (HSA) with retirement assets?

  • Yes, you can make a one-time, no penalty, tax-free rollover from your IRA to your HSA.  

  • This is called a Qualified HSA Funding Distribution

Can I use my HSA even if I’m Unemployed?

  • Yes.

  • The CARES Act also added language that allows for the purchase of over-the-counter medications with your HSA (and Flexible Spending Accounts) for items such as pain and allergy relief and testing and treatment for COVID-19 benefits before your deductible is met.