CARES Act Changes for COVID-19 Relief

March 27, 2020

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.

Coronavirus-Related Distributions

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,
    • furloughed,
    • 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    • having a job offer rescinded or start date for a job delayed due to COVID-19, or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.

Next Steps

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.

Related Articles

What Does E-Delivery Mean for My 401(k) Plan?

What Does E-Delivery Mean for My 401(k) Plan?

In May, the DOL passed a new regulation that allows plan administrators to deliver retirement plan documents to participants online. This is a significant departure from previous rules surrounding plan disclosures. So what does this mean for your 401(k) plan?...

read more
Electronic Delivery Updates for Retirement Plans

Electronic Delivery Updates for Retirement Plans

On May 21, 2020, the Department of Labor (DOL) announced a final rule for the electronic delivery of retirement plan documents. The new electronic delivery rules allow plan administrators to provide retirement plan disclosures to participants electronically, which...

read more

Subscribe to receive our latest posts.

ERISA CONSULTANTS BLOG DISCLAIMER

Articles posted on the ERISA Consultants Blog are provided for general informational purposes only. The materials and content are not intended to provide tax, legal, accounting, financial, or other professional advice. Readers are advised to seek out qualified professionals that provide advice for specific client circumstances. ERISA Consultants makes no warranties about the accuracy or completeness of the information contained in the published articles. While articles are generally published with the most up to date information, ERISA Consultants does not guarantee that the articles will be updated with the most recent information or reflect the most current laws and regulations. 

Third-party links included in any articles are not intended as, and should not be interpreted as, constituting or implying ERISA Consultants’ endorsement, sponsorship, or recommendation of third-party information, products, or services, unless expressly stated otherwise. ERISA Consultants is not affiliated with the owners or participants of any linked websites. The opinions expressed by any guest writers and/or article sources are strictly their own and do not necessarily represent those of ERISA Consultants. Please use caution when linking to other websites.

Information from the ERISA Consultants blog should be used at your own risk. Investing in securities involves risk, and there is always the potential of losing money. Past performance is not a guarantee of future results. Investment returns vary and may involve gains or losses.

Any articles or commentary included on the ERISA Consultants blog do not constitute a tax advice and cannot be used by any taxpayer to avoid penalties that may be imposed under the Internal Revenue Code on the taxpayer.