On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (CARES) “the Act” was signed into law. This is a wide sweeping piece of legislation with complex economic stimulus and tax provisions. The following information is intended as a summary of those terms of the Act related to retirement plans and accounts. Attached is a link to the Act itself. Under the terms of the Act, plan sponsors will have the ability to decide whether to allow the distribution and loan provisions. Only eligible participants themselves will be allowed to make loan or distribution requests.
Plans may permit eligible participants to withdraw up to $100,000 of their vested account balance until December 31, 2020. These distributions are exempt from the mandatory 20% withholding as well as the 10% early withdrawal penalty.
Participants will have the ability to contribute the amount of the distribution back into an employer-sponsored plan or IRA within three years from the date of distribution without affecting their annual contribution limit. Any amount not put back into an employer plan or IRA will be subject to income tax at the participant’s rate but the tax liability can be repaid over 2020, 2021 and 2022.
Coronavirus-Related Plan Loans
The Act increases the loan limit from $50,000 to $100,000 for new loans taken by eligible participants before September 23, 2020 (180 days following enactment of CARES).
If requested by a participant, plan sponsors must suspend loan repayments for up to 12 months. The repayment deferral request must be made by December 31, 2020. The amount of time the loan repayment is suspended will be added to the original loan term when repayments resume and does not affect the 5-year repayment rule. Interest is accrued during the deferral period.
Participants with active loans as of March 27, 2020 who are furloughed or laid off but are still considered active employees may also suspend loan repayments for up to one year while they are on unpaid leave. The amount of time the loan repayment is suspended will be added to the original loan term when repayments resume and does not affect the five-year repayment rule. Interest is accrued during the deferral period.
Coronavirus related distributions/loans are available to eligible participants who:
- Are diagnosed with a coronavirus (COVID-19 or SARS-CoV-2) illness
- Have a spouse or dependent diagnosed with a coronavirus illness
- Experienced adverse financial consequences from quarantine, layoff or furlough, reduction in work hours, business closure, lack of child care or other factors determined by the IRS due to the coronavirus emergency
Even if a participant is not a qualified individual, he or she may be eligible to receive a hardship distribution from a retirement plan that permits hardship distributions on account of a federally-declared disaster to a participant who lives or works in a disaster area as declared by the Federal Emergency Management Agency (FEMA), in accordance with the safe harbor hardship distribution regulations. To date, FEMA has declared numerous states to be disaster areas as a result of the COVID-19 epidemic.
Plan Sponsor Approval/Confirmation of Need
Plan sponsors can adopt the CARES distribution and loan provisions immediately. Plan amendments would need to be finalized by the last day of the plan year 2022. Plan sponsors and/or administrators may rely on a participant’s claim of eligibility.
Defined Benefit Plan Contributions
Under the Act, all single-employer funding obligations due during 2020 may be extended until January 1, 2021. Interest must be included on payments made after the original due date.
Plan sponsors may also elect to apply the plan’s funded status for the 2019 plan year in determining the application of benefit restrictions for plan years which include calendar year 2020.
Safe Harbor 401(k) Contributions
Can possibly be discontinued mid-year with the following stipulations:
- The Employer would need to have incurred a substantial business hardship in order to discontinue the safe-harbor contributions mid-year.
- A plan amendment and board approval in writing would be needed prior to any suspension of contributions.
- The Employer must provide a 30-day notice to Participants before the plan can be amended for the elimination/discontinuance of the safe harbor contribution.
- The Amendment to discontinue contributions shall only apply prospectively after the Amendment Effective Date.
- Any safe-harbor contributions that have already accrued prior to the Amendment Effective Date must still be contributed by the Employer.
If the employer discontinues the safe harbor contributions by amendment, the plan shall be subject to all testing requirements for the entire plan year. Please note that this could be more costly than the safe harbor amount.
Terminated/Laid Off Participants
Temporary layoffs/furloughs do not normally get treated as a distributable event. If there is an expectation the employee is to be re-employed in the near future, a distribution due to Termination would not be applicable.
If the employer actually terminates employees as permanent layoffs, it could possibly cause a partial plan termination if 20% of the workforce is involved. This triggers 100% vesting for affected participants. Any distributions to permanently terminated employees should be carefully reviewed to ensure the vesting for each participant is correctly determined.
Waiver of 2020 Required Minimum Distributions
RMDs are waived for 2020 for all types of defined contribution plans (including 401(k), 403(b), governmental 457(b) and IRAs). This also applies to RMDs due in 2020 but attributable to 2019. RMDs are not waived for defined benefit or cash balance plans.
There is also relief for eligible IRA account owners who have already taken their 2019 distribution. If the distribution took place within the last 60 days (and isn’t prohibited under the once per year rollover rule) then the individual can contribute/transfer the RMD amount back to the IRA or plan before the end of the 60- day window.
If the 60-day window has passed and the individual is deemed eligible under the affected person criteria the rollover can be completed anytime during the three- year period from the date the distribution was received – going back as far as January 1, 2020.
Please note that these are general guidelines and represent a summary of the terms of the Act. Each plan has its own provisions that should be considered along with the CARES legislation. Plan sponsors should always consult with their TPA before making any changes to their plan.
We expect clients, both business owners and individuals, to have many questions about how this new legislation affects their retirement plan accounts.
Have Questions? We are here to help.
David Byrnes, AIF
Practice Director - Retirement Plans