CARES Act Relief for Retirement Plan Sponsors & Participants
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to assist individuals and businesses hit hard by the effects of the SARS-CoV-2 virus and the incidence of COVID-19. In addition to general financial relief provisions, there are several provisions designed to help plan sponsors of retirement plans and plan participants.
The CARES Act allows plan sponsors to offer penalty-free in-service distributions from their retirement plan to eligible participants. Since these would be in-service distributions, they are different from hardship distributions, and hardship rules would not apply. These coronavirus-related distributions (CRD) allow certain participants to receive a distribution from the plan if they are a “qualified individual.”
A qualified individual is someone who meets any of the following conditions:
- The participant, his/her spouse or dependent has been diagnosed with the virus by a Centers for Disease Control and Prevention-approved test.
- The participant has suffered financially due to layoff, furlough, quarantine or reduced work hours from the pandemic.
- The participant cannot work due to unavailability of child care due to the pandemic.
- The participant’s business had to close or operate under reduced hours.
The plan participant may certify his/her eligibility as a qualified individual under any of these conditions. Plan sponsors are not required to confirm the participant’s certification.
A distribution of up to $100,000 or 100 percent of a participant’s vested balance, whichever is less, is available. If there are multiple plans from which distributions are available, this limit applies in aggregate. This distribution would be subject to ordinary income tax but is exempt from the 10 percent excise tax that would otherwise apply. Federal income tax withholding on this distribution is optional.
CRDs are subject to special income tax treatment. Participants may pay their income taxes over a three-year period. They also may repay all or part of this distribution to any plan that can accept rollovers (within the three-year period). So, a distribution from a 401(k) plan could be rolled over to an individual retirement account (IRA), etc. Any repayments would be treated as a tax-free rollover. This follows previous relief procedures that allowed participants who repay distributions to file amended tax returns to recover tax paid in earlier years. Further guidance on this issue is anticipated from the IRS.
This distribution option is available to an eligible defined contribution retirement plan—401(k), profit-sharing, 403(b) plans and governmental 457(b) plans—and IRAs. The law is clear that ordinary distribution prohibitions from 401(k), 403(b) and 457(b) plans will not be violated when following these rules. However, CRDs are not allowed from defined benefit or money purchase pension plans.
CRDs are not eligible rollover distributions, so there is no mandatory 20 percent federal income tax withholding. This also would affect state income tax withholding rules. These distributions are available until December 31, 2020.
The CARES Act includes optional participant loan changes. The maximum participant loan is increased to $100,000 or 100 percent of a participant’s vested account balance, whichever is less. The loan is reduced by the greater of the highest outstanding loan balance during the one-year period ending on the day before the date on which the loan is made or the plan’s outstanding loan balance on the date on which the loan is made. The participant must be a qualified individual as defined above. This increased loan availability is effective for 180 days following the March 27, 2020, effective date of the law. Thus, this only applies to loans made on or before September 23, 2020.
In addition, repayment for current outstanding loan payments from March 27, 2020, through December 31, 2020, may be suspended for up to 12 months if payments are current. Interest would continue to accrue during the suspension. The repayment term can be extended beyond the original term for up to one year.
Required Minimum Distributions (RMD)
There is relief from the RMD rules, similar to relief provided during 2009. For any RMD due in 2020, RMDs are not required to be made from defined contribution plans—401(k), profit-sharing, 403(b) plans and governmental 457(b) plans—and IRAs. This applies to both 2019 RMDs that were due by April 1, 2020, and RMD payments to be made by December 31, 2020. This relief does not apply to defined benefit or money purchase pension plans.
Any RMD that was previously distributed in 2020 is eligible to be rolled over. It is expected that the IRS will extend the 60-day rollover period.
For a plan to implement the changes permitted under the CARES Act, the plan must be amended. The amendment deadline is the last day of the first plan year beginning on or after January 1, 2022. For a calendar-year plan, the amendment deadline would be December 31, 2022. For a governmental plan, the deadline is the last day of the first plan year beginning on or after January 1, 2024. For a calendar-year plan, the amendment deadline is December 31, 2024.
This deadline applies to the mandatory provisions, i.e., the waiver of 2020 RMD payments, and optional provisions related to distributions and loans must be retroactive to the date of operational effect.
Defined Benefit Plans
The contribution deadlines for defined benefit and money purchase pension plans due in 2020 have a delayed due date of January 1, 2021. If a contribution to the plan is delayed, the employer must pay interest from the due date to the payment date using the effective rate of interest for the plan, based on the plan year that includes the payment date.
Plan Sponsor Action Items
Consider if you want to implement the CRD or coronavirus loan procedures. These new provisions are optional to elect, so plans do not have to offer CRD or expand the loan provisions. To implement one or both, talk with your retirement plan professional and record-keeper. If you decide to elect one or both options, you should amend the plan document in a timely manner; update the plan’s distribution or loan process to accommodate these changes; and prepare the proper participant notifications. You also may need to revise loan amortization schedules.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. If you have any questions, please contact the Benefit Plan Consulting group with BKD Wealth Advisors, LLC or submit the Contact Us form below.