Mar 30, 2020

Retirement Plan Relief in the CARES Act

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On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  Among many other provisions, the CARES Act allows participants affected by the 2020 coronavirus pandemic to have greater access to retirement funds.  The new law loosens the in-service distribution restrictions that apply to many retirement plans and significantly eases the tax burden on qualified individuals who take distributions from qualified retirement plans or IRAs.

The CARES Act also (i) for qualified individuals, expands the qualified plan loan rules; and (ii) for all retirement plan participants and IRA owners, following a cue from relief issued after the 2008 financial collapse, temporarily waives required minimum distributions from defined contribution plans and IRAs for 2020.  Employers with defined benefit plans may delay required contributions and may use their plan’s prior funding status for purposes of funding-based restrictions on benefits and amendments.

Qualified Individuals Eligible for Relief

Most of the provisions providing relief apply to “qualified individuals” consisting of persons who:

  • are diagnosed with COVID-19;
  • have a spouse or tax dependent who is diagnosed with COVID-19; or
  • experience adverse financial consequences as a result of:
    • being quarantined due to COVID-19;
    • being furloughed or laid off or having work hours reduced due to COVID-19;
    • being unable to work due to lack of child care due to COVID-19; or
    • the closing or reduction in hours of a business owned or operated by the participant due to COVID-19.

A plan administrator may rely on a participant’s certification that the participant satisfies the requirements to be a qualified individual.  No documentation is required.

Limitation on Distribution Amounts

If a person is a qualified individual, favorable tax provisions apply to a maximum of $100,000 in “coronavirus-related distributions” from qualified retirement plans and IRAs.  A “coronavirus-related distribution” is any distribution made to a qualified individual between January 1, 2020, and December 31, 2020.  There is no requirement that the amount of the coronavirus-related distribution be limited to the amount of the qualified individual’s actual financial needs.

A qualified individual may take coronavirus-related distributions from multiple sources, such as both a qualified retirement plan and an IRA, but the total amount of distributions eligible for favorable tax treatment is limited to $100,000.

Types of Relief for Coronavirus-Related Distributions

In-Service Distributions Allowed. Normally, participants who are still employed are restricted from taking distributions from 401(k), 403(b) and 457(b) plans.   The CARES Act allows plan sponsors to permit qualified individuals to take “coronavirus-related distributions” through December 31, 2020.  The aggregate amount of all coronavirus-related distributions made to a qualified individual by a single plan (or by multiple plans maintained by a single plan sponsor or members of a single controlled group) cannot exceed $100,000

Tax Treatment of Coronavirus-Related Distributions. For up to $100,000 in coronavirus-related distributions made to an individual between January 1, 2020, and December 31, 2020, the CARES Act:

  • Eliminates the 10% “early distribution” penalty that generally applies to distributions from retirement plans and IRAs before age 59½;
  • Exempts distributions from the 20% Federal tax withholding that normally applies to distributions (other than hardship distributions) that are paid directly to participants;
  • Allows participants to avoid taxation by repaying distributions within 3 years; and
  • Allows participants to elect to spread the inclusion of income from distributions over 3 years.

Increased Loan Amounts and Delayed Repayment. For retirement plan loans to qualified individuals made between March 27, 2020 and September 23, 2020, the CARES Act:

  • Increases the maximum loan amount from $50,000 to $100,000; and
  • Allows participants to take the full amount of their vested benefit as a loan, rather than limiting the loan amount to 50% of their vested balance.

The CARES Act also delays the due date for loan repayments for qualified individuals that are due between March 27, 2020 and December 31, 2020 for 1 year, and extends the maximum 5-year repayment period accordingly.

Waiver of Minimum Distribution Requirements

Defined contribution plans generally must begin making “required minimum distributions” (RMDs) by April 1 of the calendar year following the later of the year in which the participant reaches age 70½ or the year in which the participant terminates employment, and then continue making RMDs as of the end of that and each succeeding calendar year.  Distributions from IRAs (other than Roth IRAs) also must begin by April 1 following the year in which the IRA owner turns 70½.

For all retirement plan participants and IRA owners (and not just qualified individuals), the CARES Act eliminates the requirement that RMDs be made from defined contribution plans (other than non-governmental 457(b) plans) and IRAs in 2020.  This avoids the need for plan participants and IRA owners to liquidate investments at a time when the stock market reflects the economic impact of the coronavirus pandemic.

Note that although the Setting Up Every Community for Retirement Enhancement Act of 2019 (the “SECURE Act”) changed the age triggering RMDs from 70½ to 72, this change did not apply to participants who attained age 70½ before 2020, so the changes made in the CARES Act are only relevant to employees whose RMDs were based on age 70½.

The CARES Act also extends by 1 year the period over which distributions must be made due to an employee’s or IRA owner’s death.

Defined Benefit Plan Relief

Employers with defined benefit plans may delay contributions otherwise due in 2020 until January 1, 2021, and may elect to use the plan’s funding status as of the plan year ending in 2019 to determine whether the plan is subject to funding-based restrictions on lump-sum benefits and amendments increasing benefits for plan years that include the 2020 calendar year.

Plan Amendment Deadline

Plan sponsors may begin operating their plans in accordance with the CARES Act immediately.  Plan sponsors will generally have until the end of the first plan year beginning on or after January 1, 2022 to amend their plans.

For more information on the retirement plan relief provided in the CARES Act, please contact your Employee Benefits and Executive Compensation Counsel at Smith, Gambrell & Russell, LLP.

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