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Withdrawals and Loans from Retirement Plans During COVID-19

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law in an effort to free up funds for individuals and ease the economic impact of the COVID-19 pandemic.[1] The CARES Act not only provides direct payments to Americans, but also creates special rules for retirement plan participants.[2]

Withdrawals from Retirement Plans

The CARES Act permits individuals to take a coronavirus related distribution (“CRD”) from their eligible retirement plan and avoid certain consequences, such as the IRS’s 10% early withdrawal penalty. In order for the distribution to meet the CRD criteria, you, your spouse, or dependent must be diagnosed with the virus SARS-CoV-2 or with COVID-19,[3] or you must have experienced one of the following:

  • adverse financial consequences as a result of being quarantined;
  • being furloughed or laid off or having work hours reduced due to such virus or disease;
  • being unable to work due to lack of child care due to such virus or disease;
  • closing or reducing hours of a business owned or operated by the individual due to such virus or disease; or
  • other factors as determined by the Secretary of the Treasury.[4]

The CARES Act allows participants of certain retirement accounts (IRA, 401(k), etc.) to receive a CRD of up to 100% of their vested retirement plan balances. Previously, the limit was set at 50%. Also, the maximum withdrawal amount from employer plans, without being penalized, has been increased from $50,000 to $100,000 under the CARES Act.

Regarding repayment of the amount withdrawn, the CARES Act provides that any individual receiving a CRD has three (3) years to pay back the amount withdrawn in order to avoid certain income tax implications. The CARES Act further provides that the amount withdrawn shall be included as gross income on the individual’s income tax return ratably over a three (3) year period.

Loans from Qualified Plans

Specifically regarding loans from qualified plans, the amount permitted has also been increased from $50,000 to $100,000, and have been capped at 100% of the vested account balance, which is an increase from the previous 50% cap. The due date for the repayment of the loan shall also be delayed for one (1) year.[5]

Community Property Considerations under the CARES Act

If you are in the midst of a divorce proceeding or are thinking about initiating one, you and/or your spouse’s retirement plan withdrawal or loan in accordance with the CARES Act may have lasting implications.

California is a community property state, which means that all assets of the marriage, including retirement plans, must be divided in half. Meaning, a non-participant spouse may be entitled to one-half (1/2) of the value of participant-spouse’s retirement plan that accumulated during the marriage.

Some questions arising from the CARES Act with respect to the division of assets in a community property state may include the following:

  • Do the Automatic Temporary Restraining Orders (“ATROs”) that are in effect at the filing of a dissolution proceeding prohibit the participant-spouse from withdrawing or taking a loan out against their retirement plan?
  • If the participant-spouse withdraws from their retirement plan or takes a loan out against it, is the non-participant spouse immediately entitled to half (1/2) of the amount?
  • Does the withdrawn amount count as income to the spouse for purposes of calculating spousal support or child support?
  • Is a non-participant spouse entitled to withdraw or take a loan out against a participant-spouse’s retirement plan?
  • How much is either a non-participant spouse or a participant-spouse entitled to withdraw from a qualified retirement plan?
  • What happens if a participant-spouse withdraws 100% of their vested retirement balance, which encompasses a portion of the non-participant spouse’s community property interest?
  • Who is responsible for paying the income taxes owed on the withdrawn funds if the amount is not repaid within three (3) years?
  • Who pays the penalty and taxes if the IRS audits the withdraw and determines the criteria of CRD was not satisfied?
  • Is there anything the non-borrowing spouse can do regarding the one (1) delay in repayment of the loan, if the non-borrowing spouse’s interest was borrowed against?

If you are experiencing adverse financial consequences due to COVID-19 and are questioning whether you can and/or should withdraw from your retirement plan, how such withdrawal may impact a dissolution of marriage action, or have specific questions regarding the tax implications of withdrawing from your retirement plan, we urge you to contact the attorneys at Cage & Miles, LLP prior to making any decisions.


[1] https://www.npr.org/2020/03/25/818881845/senate-reaches-historic-deal-on-2t-coronavirus-economic-rescue-package; https://www.congress.gov/bill/116th-congress/senate-bill/3548/text.

[2] See Sen. Bill No. 3548 (2020 2d Sess.) §2103 et seq.

[3] Note that the diagnosis must come from a test approved by the Centers for Disease Control and Prevention. Id. at §2103(a)(4)(A)(ii)(I).

[4] Id. at §2103(a)(4)(A)(ii).

[5] Id. at § 2103(b) et seq.