July 7, 2020 — UPDATE: U-M has expanded eligibility to take qualifying distributions to former employees age 55 and younger who meet the federal guidelines as defined under What is a qualifying coronavirus contribution? below.
Overview of the CARES Act
To help ease financial hardship across the U.S. due to the global COVID-19 pandemic, in March the U.S. Congress enacted the $2 trillion federal Coronavirus Aid, Relief, and Economic Security (CARES) Act. The goal is to provide emergency funds to people significantly impacted by job loss or reduction, coronavirus-related illness, loss of child care, and more.
One aspect of the CARES Act is access to funds in retirement accounts, including those offered through U-M’s employee benefits. The following information is a starting point for your questions about eligibility, which funds are affected, tax considerations and more.
Because each person’s situation is different, U-M recommends that you contact TIAA and/or Fidelity Investments, the university’s official partners for employee retirement investments, directly to arrange transactions or for further questions.
- U-M faculty, staff, and former employees may take a cash withdrawal from their contributions and earnings made to the 403(b) Basic Retirement Plan, 403(b) SRA, and 457(b) for qualifying coronavirus distributions under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act.
- The CARES Act does not extend withdrawals to the 401(a) Basic Retirement Plan for current faculty and staff members. These amounts are the university contribution since July 1, 1989, and the 5% employee contribution on earnings exceeding the U.S. Federal Insurance Conditions Act (FICA) wage base for compulsory participants.
- Former employees may take a CARES Act qualifying coronavirus distribution of 403(b) and 401(a) contributions and earnings made to the U-M Basic Retirement Plan. This includes the ability to withdrawal the 401(a) university contribution that was previously unavailable to former employees until age 55 or older if the distribution meets the CARES Act definition.
- The combined limit on loans from the 403(b) SRA and 457(b) has been raised from $50,000 to $100,000 for CARES Act coronavirus loans.
- Faculty and staff interested in taking a distribution or loan should contact TIAA and/or Fidelity Investments directly.
What are my financial options under the CARES Act?
U-M has adopted a provision in the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act that may provide you with financial options during the COVID-19 pandemic. The CARES Act allows faculty, staff and former employees to take a withdrawal of up to $100,000 of contributions and earnings made to the 403(b) Basic Retirement Plan, 403(b) SRA, and 457(b) Deferred Compensation Plan for qualifying distributions. Former employees may also take qualifying distributions from the 401(a) Basic Retirement Plan, subject to the combined $100,000 limit.
Under the Act, you may pay the taxes for the withdrawal over a three-year period instead of all at once and may take up to three years to repay the withdrawal back into your retirement account, although this is not required.
In addition, the U.S. Internal Revenue Service (IRS) 10% penalty for withdrawals taken before age 59½ has been waived for coronavirus distributions. Finally, the limit for taking a 403(b) SRA and/or 457(b) loan increases to $100,000 for a qualifying loan.
What is a qualifying coronavirus distribution?
The CARES Act defines qualifying distributions as being made by an individual:
- Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
- Whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or
- Who experiences 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 U.S. Secretary of the Treasury (or the Secretary’s delegate).
In addition, under section 2202(a)(4)(A)(ii)(III) of the CARES Act, the U.S. Treasury Secretary provides guidance for other qualifying factors. A qualified individual is an individual who experiences adverse financial consequences as a result of:
- The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
- The individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.
Which U-M plans are covered by the CARES Act?
Faculty, staff, and former employees may take up to $100,000 in qualifying coronavirus distributions through Dec. 31, 2020 of their contributions and earnings made to the following plans:
- 403(b) Basic Retirement Plan
- 403(b) Supplemental Retirement Account (SRA)
- 457(b) Deferred Compensation Plan
- 401(a) Basic Retirement Plan - Applies to former employees only; university contributions and earnings are available even if under age 55.
The CARES Act also applies to the U-M contributions made to the 403(b) Basic Retirement Plan prior to July 1, 1989. Starting July 1, 1989, the U-M contribution changed from 403(b) to 401(a).
The following chart lists the TIAA and Fidelity recordkeeping numbers that identify the various U-M plans. You must refer to the plan number(s) if you enact a coronavirus distribution.
|U-M Plan Name||TIAA Plan Number||Fidelity Plan Number|
|403(b) Basic Retirement Plan||101010||72104|
|403(b) Supplemental Retirement Account or SRA||101013||72103|
|457(b) Deferred Compensation Plan||101012||66806|
|401(a) Basic Retirement Plan||101011||86503|
What is not covered by the CARES Act?
The CARES Act does not extend coronavirus distributions to the U-M 401(a) Basic Retirement Plan to faculty and staff who are currently employed. The 401(a) contributions consist of the following:
- University contributions made on or after July 1, 1989.
- The faculty or staff member contribution on earnings exceeding the Federal Insurance Conditions Act (FICA) wage base for compulsory participants (faculty and staff age 35 or older with a 100% appointment and two or more years of service) made on or after July 1, 1989.
How does the CARES Act apply to TIAA Traditional?
TIAA Traditional accumulations in the Basic Retirement Plan are not available for lump-sum withdrawals and are not eligible for CARES Act coronavirus distributions. TIAA Traditional in the 403(b) SRA and 457(b) may be taken as a lump sum withdrawal and are eligible for coronavirus distributions under the CARES Act.
Is there a favorable tax treatment for taking a coronavirus distribution?
Distributions are subject to taxation; however, there are unique tax advantages for coronavirus distributions under the CARES Act:
- The 10% penalty for distributions taken before age 59½ has been waived.
- Although most in-service withdrawals are subject to mandatory 20% federal tax withholding when a distribution is made to a plan participant, the CARES Act waives that requirement for coronavirus distributions. Income tax is still due on the distribution, and you have the option to have TIAA and/or Fidelity withhold income tax.
- You may pay the taxes for the coronavirus distribution during a three-year period instead of all at once.
- You may repay the coronavirus distribution back into your retirement account during a period of up to three years, although this is not required.
Can I still get the favorable tax treatments if I am already eligible for a withdrawal?
You can still benefit from the favorable tax treatment of coronavirus distributions if you are already eligible for a withdrawal. For example, you can take a withdrawal for any reason from the 403(b) SRA and 457(b) at age 59½ or older. You can claim the favorable tax treatment of the distribution if you have a qualifying coronavirus expense.
Does the CARES Act apply to loans?
Yes. The CARES Act increases the aggregate limit for taking a 403(b) SRA and/or 457(b) loan from $50,000 to $100,000 for qualifying loans made from March 27, 2020 through Sept. 23, 2020. The $100,000 loan limit is in addition to the $100,000 you can take as a qualifying coronavirus distribution. You may also defer repayments of existing loans and CARES Act loans through Dec. 31, 2020 if you meet the same qualifying conditions for a coronavirus distribution. Please also note that loans are not available under the Basic Retirement Plan.
How do you qualify for a CARES Act loan and repayment deferment?
The same criteria that apply to the coronavirus distributions (see above) also apply to the CARES Act loans and deferment provisions.
Does U-M have to approve my qualifying coronavirus distribution or CARES Act loan?
No. The university has notified TIAA and Fidelity that U-M has adopted qualifying coronavirus distributions for the 403(b) Basic Retirement Plan, 401(a) Basic Retirement Plan (former employees only), 403(b) SRA and 457(b), as well as CARES Act loans and loan repayment deferments. There are no forms or U-M authorization needed to enact these transactions.
How do I arrange for a coronavirus distribution or loan?
Call U-M’s financial partners, TIAA and Fidelity Investments, directly.
How do I certify that I meet the coronavirus criteria in the CARES Act?
You will self-certify that your coronavirus distribution or loan qualifies under the CARES Act when you submit your request to TIAA or Fidelity. U-M’s Benefits Office has no role in approving your distribution or loan, and does not certify that you have met the coronavirus qualifying criteria. Your self-certification is your attestation to the IRS that you meet the criteria and you accept the responsibilities for doing so.
Consult with a Tax Advisor
The preceding is an overview of the CARES Act and is based on the university’s current understanding of highly complex Internal Revenue Code (IRC) and U.S. Treasury Department regulations. It is provided for informational purposes only, and every effort has been made to ensure its accuracy.
The University of Michigan does not provide tax advice. It is the responsibility of the plan participant to comply with federal tax laws and the CARES Act when electing a coronavirus distribution or CARES Act loan. This includes your representation that you are eligible for a CARES Act qualifying coronavirus distribution or CARES Act loan or loan deferment. Questions or concerns should be addressed to a qualified tax advisor.