How the CARES Act May Impact Your Retirement Accounts During Divorce
-written by Attorney Maureen Renehan
The COVID-19 Pandemic has had a financially crippling effect on many individuals. Millions of Americans have lost their jobs or their work hours have been decreased. As a result, many American families are finding themselves in a position where they cannot afford to pay their bills. The new Federal Legislation, the “Coronavirus Aid, Relief, and Economic Security Act” (hereinafter the “CARES Act”), is the government’s response to the public’s need for financial assistance. The CARES Act contains provisions which impact an individual’s retirement funds in a variety of ways.
What the CARES Act Provides Regarding Retirement Accounts:
The CARES Act allows individuals to seek financial relief in the form of distributions from their retirement accounts. Generally, individuals that are not yet at “retirement age” (those who are under the age of 59½) are subject to a 10% withdrawal penalty on the amount of any distribution from their retirement accounts. The CARES Act has removed this 10% withdrawal penalty for “coronavirus-related distributions” of up to $100,000.00 per individual. “Coronavirus-related distributions” are distributions which occur during the calendar year 2020 to individuals who (1) are diagnosed with COVID-19; (2) have a spouse or dependent who has been diagnosed with COVID-19; or (3) experience adverse financial consequences as a result of their employment being impacted by COVID-19. Ways in which individual’s employment may be impacted by COVID-19 include: (a) the individual being quarantined, (b) the individual being furloughed or laid off from their employment, (c) the individual’s work hours having been reduced, (d) the individual being unable to work due to a lack of child care, or (e) the individual who owns his or her own business which has closed down or has reduced hours. The Coronavirus-related distribution is treated as taxable income to the individual; however, it is apportioned as income over a period of three years, rather than one year, beginning in the year the distribution is made.
The CARES Act further permits individuals to seek financial relief in the form of a loan from their retirement accounts. Beginning on March 27, 2020, the date the CARES Act was enacted, and continuing for a period of 180-days, individuals may take loans from applicable retirement accounts if certain criteria is met. These loans will not be treated as distributions under very specific circumstances, which you should discuss with your accountant and/or attorney.
The CARES Act also provides relief to individuals who have a current loan against their retirement accounts which has a repayment date during the period of time dating from March 27, 2020 through December 31, 2020. For those individuals, the repayment date will be extended for one year.
How Retirement Accounts are Addressed in a Divorce Case
Retirement accounts which are acquired during the parties’ marriage are considered marital property and are thus subject to division at the time of divorce. Maryland statute authorizes the Courts to transfer ownership of an interest in a pension, retirement, profit sharing, or deferred compensation plan from one party to either or both parties. (Md. Code Ann. Fam. Law §8-205).
The Impact of the CARES Act on Retirement Accounts in Divorce Cases
Because the CARES Act permits individuals to take distributions or loans against their retirement accounts, it enables a party to reduce the overall value of their retirement accounts. If the overall value of a retirement account is reduced, there is less of that account to divide between the parties at the time of divorce. Typically, when a party takes a distribution or a loan against their retirement accounts while they are married or separated, the other spouse must provide written consent for such a distribution or loan. It is unclear if the CARES Act still requires this spousal consent.
Thus, the CARES Act that may come into play in your divorce case in one of two ways. First, if you are in need of financial assistance and you meet the requirements of the CARES Act, you may be eligible to apply for a distribution or a loan from your retirement accounts in order to pay your bills. Second, it is important to be aware that your spouse may be eligible to do the same, and therefore the CARES Act may provide him or her with a mechanism to reduce the total value of his or her retirement accounts which may be a marital asset.