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The CARES Act and Its Impact on Retirement Plans

This is the third in a series of articles discussing the impact that the COVID-19 (coronavirus) pandemic and the governmental responses to it have had on employee benefits. The first two articles dealt with employer group health plans, continuation coverage, HIPAA privacy, and other welfare benefit plans.

This article summarizes the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted March 27th that affect employer-sponsored retirement plans and individual retirement accounts (IRAs).

Coronavirus-Related Distributions

The CARES Act creates a new type of permissible distribution under 401(k), 403(b), and governmental 457(b) plans plus IRAs. The Act states that “coronavirus-related” distributions will not violate provisions in 401(k), 403(b), and governmental 457(b) plans that limit distributions. However, this new type of distribution is not available under defined benefit or money purchase plans.

A participant may receive a “coronavirus-related” distribution of up to $100,000 without the application of the additional 10% premature distribution tax provided the distribution is made for one of the following reasons:

(i) The participant, his or her spouse or dependent has been diagnosed with the coronavirus (as confirmed by a CDC-approved test); or

(ii) The participant has suffered financially from the pandemic because:

      a. The participant was laid off, furloughed, quarantined or had work hours reduced;

      b. The participant cannot work due to the unavailability of childcare because of the pandemic; or

      c. The participant’s own business had to close or reduce hours.

Plan administrators may rely on the participant’s certification that he or she qualifies for a distribution. Distributions may also be available for beneficiaries of deceased participants and for alternate payees.

Although exempt from the 10% penalty tax, the coronavirus-related distribution is subject to ordinary income tax, but not necessarily in the year received. A participant may elect to spread the taxes over a three-year period and may repay all or part of the distribution to the plan or any plan that accepts rollovers within that period. The repayment is treated as a tax-free rollover of the funds to the plan and is not adjusted for earnings. Participants who repay distributions may file an amended return to recover tax paid on income reported in earlier years.

Coronavirus-related distributions are not eligible rollover distributions and are thus not subject to 20% mandatory withholding when distributed. However, they are subject to 10% withholding unless the participant waives withholding. Employers are required to give participants a notice that the withholding is waivable. Failure to provide the notice subjects the employer to a $100 penalty per participant, up to a maximum of $50,000.

Increases to Loan Limits and Additional Time to Repay

The general plan loan limit of Section 72(p) (i.e., 50% of a participant’s vested account, up to $50,000) has been amended to permit loans of up to 100% of the vested account, up to $100,000, but only as to loans made during the 180 days after CARES Act enactment (i.e., through September 23, 2020).

Any loan payment due on any outstanding loan between March 27th and December 31, 2020 is delayed for up to one year. The five-year repayment period is also extended for one year. Interest on the loan accrues during the delay period.

Because of the uncertainty as to how repayments of coronavirus-related distributions will be processed, some commenters have suggested that it may be advisable for participants to first take plan loans. This is because the rules governing loan repayment are much clearer. Also, if a participant terminates employment within one year of taking a loan, the loan could be converted to a distribution at that time.

Required Minimum Distributions (RMDs) Relief for 2020

RMDs due in 2020 are not required from 401(k) plans, 403(b) plans, governmental 457(b) plans, and IRAs. This new rule also applies to any unpaid 2019 RMD that was required to be made no later than April 1, 2020. Also, if the RMD is due to death, the five-year maximum distribution period is determined by disregarding 2020.

This change will help prevent the liquidation of deflated investments during this period, allowing them time to hopefully recover value. The 2021 RMDs will be based on the account values at December 31, 2020, which means that the RMDs should be lower unless the market rebounds.

Single Employer Defined Benefit Plan Funding Delay

The Act provides funding relief during 2020 for employers that sponsor defined benefit plans. The deadline for any required contributions to defined benefit plans (including quarterly contributions) during 2020 is extended to January 1, 2021. The minimum funding amount will be increased by the plan’s rate of interest for the interim period.

Department of Labor Authority to Postpone Due Dates

Through the CARES Act, Congress has given the DOL authority under ERISA to delay deadlines because of public health emergencies. It is expected that the DOL will use its new authority to grant extensions of Form 5500 due dates.

When Must Retirement Plan Documents be Amended for CARES Act Changes?

Non-governmental sponsored plans must be amended for CARES Act provisions no later than the end of the 2022 plan year (i.e., December 31, 2022 for a calendar year plan) or a later date set by the Secretary of the Treasury. Governmental plans must be amended by the end of 2024. The amendment must be retroactive to the date that the plan implemented a CARES Act change.

Contact Information

If you have any questions, please contact Brent Gambill (937-449-5539; [email protected]) or Edie Crump (937-449-5530; [email protected]).

Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail.

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