Congress passed the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) Friday March 27, 2020. This 2 trillion dollar bill provides economic relief to Americans in the midst of the global COVID-19 pandemic. The provisions of the bill relating to retirement plans are designed to provide immediate financial relief to participants who are experiencing financial difficulty by providing broader access to eligible retirement plan funds.
Below are the key provisions in the CARES Act relating to qualified retirement plans.
Individuals are permitted to withdraw up to $100,000 from their retirement accounts, penalty free, as long as the withdrawal is repaid within three years. Congress also waived the 10% penalty tax for early withdrawals from a retirement plan or IRA.
There are a few conditions for qualified individual to take a coronavirus related distribution: the withdrawal must be from an eligible retirement plan, so a 401(k) or profit-sharing plan, or an IRA, and the distribution must qualify as a “coronavirus related distribution.” Lastly, the distribution must occur in the 2020 calendar year.
A qualified individual is one in which:
- An individual is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act; or
- A spouse or dependent is diagnosed with COVID-19 by an approved test, or
- An individual, individual’s spouse, or a member of the individual’s household who experiences adverse financial consequences as a result of:
- being quarantined,
- laid off,
- having work hours reduced,
- being unable to work due to lack of childcare due to COVID-19,
- closing or reducing hours of a business owned or operated by the individual due to COVID-19;
- having a job offer rescinded or start date for a job delayed due to COVID-19, or
- Any other factor as determined by the Treasury Secretary
This is the expanded definition, which is included in the newly issued IRS guidance Notice 2020-50.
Income Inclusion and Repayment of COVID-19 Distributions
The distribution would be included in an individual’s taxable income over a three-year period, unless the participant opted to have the withdrawal taxed in the year of distribution. Since these distributions would not be treated as taxable distributions, the mandatory 20% tax withholding wouldn’t apply.
A participant also has the option of repaying the COVID-19 related withdrawal to an eligible retirement plan within three years of the distribution – this would be treated an eligible rollover, so it would be subject to the mandatory 20% tax withholding.
Since the coronavirus related provisions are optional and plan sponsors are not required to offer them to participants, a participant may claim tax benefits of a COVID-19 distribution even if the plan provisions are not changed to include the coronavirus related relief provisions.
Temporary Loan Limit Increase
The CARES Act doubles the loan limit to $100,000 for loans made from March 27, 2020 to September 22, 2020. So an individual may borrow $100,000 or 100% of their account balance, whichever is lesser. This is a significant increase from the $50,000 loan limit typically permitted.
If the Plan Document doesn’t already permit loans from the plan, the Plan Document will need to be amended to allow loans before the plan sponsor can issue a coronavirus related loan to a participant.
Loan Repayment Extension
Participants with a current outstanding loan with a repayment due from March 27, 2020 until December 31, 2020 can suspend their loan repayments for up to one year. The remaining loan payments and interest can be amortized over the extended period, which would increase an employee’s take-home pay for a higher cash flow during this year.
Required Minimum Distributions (RMDs) Are Temporarily Waived
The CARES Act waives RMDs for the calendar year 2020 for 401(k), 403(b), 457(b) plans and IRAs. This provision is especially important for retirees who would otherwise be taking RMDs in 2020. RMDs are based off of the account balance as of the end of the prior year, so December 31, 2019. With this provision, retirees are no longer required to take the RMDs and pay taxes on them at a time when their account balances may be lower now than when the distribution amount was calculated. This provision is similar to the RMD suspension applied in 2009 after the financial crisis of 2008, which worked well for many retirees.
Do I need to amend my plan?
Retirement plans are permitted to adopt the Coronavirus-related distribution and loan rules immediately, regardless of whether the plan currently includes these provisions. Plans have until the end of the 2022 plan year to retroactively adopt an amendment to reflect the recent changes. But, the plans must be in operational compliance with the new provisions from the time the provisions are put in place.
Potential Deadline Extensions
The CARES Act amended section 518 of ERISA to allow the Labor Secretary to provide extensions for certain compliance deadlines in the event of a public health emergency. A similar provision has been enacted previously under presidentially declared natural disasters, such as hurricane and wildfires.
Plan sponsors have the option to offer coronavirus related relief to participants. Since these new provisions aren’t mandatory, it’s important to let your participants know which provisions will or will not be offered to them. Keeping track of the date that any new provisions are available is also important so that the date can be accurately recorded in the plan amendment.
New distribution forms or updated loan forms may also be necessary to accurately record participant requests.
Have questions? Contact us. Our team of experts can help you navigate the CARES Act and your retirement plan.