Congress passed the Coronavirus Aid, Relief, and Economic (CARES) Act on March 27, 2020. The CARES Act includes provisions that impact retirement plans of all types. Continue reading to learn more about the key CARES Act provisions passed.
- Coronavirus-Related Distribution
This is a new distribution category that may be added to existing plans. Plans may permit an in-service coronavirus-related distribution from a participant’s vested account balance without regard to the normal withdrawal restrictions. A coronavirus-related distribution is a distribution made during the calendar year 2020 to an individual (“eligible participant”) who:
- Is diagnosed with the coronavirus (COVID-19 or SARS-CoV-2) illness.
- Has a spouse or dependent diagnosed with the coronavirus illness.
- Experienced “adverse financial consequences” as a result of quarantine, furlough, lay-off, reduction in work hours, business closure, the lack of childcare, or other factors determined by the IRS due to the coronavirus emergency.
Plan administrators may rely on participant’s certification of the above.
A coronavirus-related distribution is subject to the following requirements:
- Limited to $100,000, aggregated across all plans of the employer or controlled group.
- Not subject to 20% mandatory tax withholding upon distribution.
- Exempt from 10% early withdrawal penalty generally applicable to distributions made to participants who are 59 ½ or younger.
- Eligible to be indirectly rolled to an IRA or an employer plan within three years from the date the distribution is taken.
- Amounts not indirectly rolled to an IRA or employer plan are included in gross taxable income. Affected participants may spread the taxes over a three-year period (beginning with the tax year of the distribution), unless the participant elects to include all amounts in a single tax year.
- Coronavirus-Related Loan Relief
Plan loan limits may be temporarily increased to the lesser of $100,000 or 100% of the participant’s vested balance. This only applies to loans made on or before September 23, 2020, and is only for “eligible participants” as outlined above.
Subject to plan approval, scheduled participant loan repayments due from March 27, 2020 through December 31, 2020, may be delayed for up to one year. Interest will continue to accrue during the period and the plan can extend the term of the loan for up to one year.
If the plan currently does not include a loan option, the plan would have to be amended to allow for loans to use this loan relief.
- Required Minimum Distribution (RMD) Waiver from Qualified 401(k), 403(b), and Governmental 457(b) Plans
If a 2020 RMD is provided to any of the following, it may be rolled over to an IRA or employer plan. A participant’s RMD or beneficiary’s life expectancy RMD for 2021 will need to be paid.
- Participant who turned age 70 ½ prior to 2019 will not be required to receive an ongoing RMD for 2020.
- Participants who turned age 70 ½ in 2019 who did not receive their first RMD for 2019 on or before January 1, 2020, will not have to receive their first (2019) RMD or their 2020 RMD.
- Beneficiaries receiving life expectancy payments will not be required to receive their 2020 beneficiary RMD.
- Beneficiaries who have an account balance in the plan and is receiving distributions over a 5-year period will be able to waive the distribution for 2020.
- Defined Benefit Plan Relief
The CARES Act provides for a delay in 2020 funding obligations. All single-employer funding obligations due during 2020 are not required to be made until January 1, 2021, with interest for late payments. Additionally, a plan sponsor may elect to apply the plan’s funded status for the 2019 plan year in determining the application of benefit restrictions for plan years which includes calendar year 2020.
- Timing of Plan Amendments
Plans may adopt the CARES Act provisions immediately provided that the plan is amended before the last day of the first plan year that begins on or after January 1, 2022 (e.g., December 31, 2022 for a calendar year plan) to reflect plan operations. This amendment deadline applies to both mandatory provisions under the CARES Act (i.e., waiver of 2020 RMD payments) and any optional provisions that a plan sponsor chooses to implement under the CARES Act (i.e. Coronavirus-related distributions).
Always remember to consult a THF Certified Public Accountant with any questions here.