CARES Act Retirement Plan Provisions

On March 27, the Coronavirus Aid, Relief, and Economic Security Act (“Act”) was signed into law by President Trump.  This third COVID-19 stimulus package has provisions affecting qualified retirement plans and IRAs, including increased penalty-free withdrawals, increases in the maximum limits for plan loans, the ability to suspend loan repayments, a temporary waiver of required minimum distributions (“RMDs”), and a funding extension for single-employer defined benefit plans.

Penalty-Free Distributions from Retirement Plans

The Act waives the 10% early withdrawal penalty tax (but not income taxes – see below) under IRC Sec. 72(t) on early withdrawals of up to $100,000 from a retirement plan or IRA for an individual who is:

1. Diagnosed with COVID-19;
2. Whose spouse or dependent is diagnosed with COVID-19;
3. Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of child care due to COVID-19;
4. Owner of a business that is closing or reducing hours due to COVID-19; or
5. Impacted by other factors as determined by the Treasury Secretary.

The Act also permits those individuals who take distributions to pay tax on the income from the distribution ratably over a three-year period and allows those individuals to repay that amount tax-free back into the plan over the next three years. Any such repayments would not be subject to the retirement plan contribution limits.

Retirement Plan Loans

The Act doubles the current retirement plan loan limits (Note: Loans are not permitted from IRAs) to the lesser of $100,000 or 100% (formerly $50,000 or 50%) of the participant’s vested account balance in the plan for loans from qualified plans to “qualified individuals” made during the 180-day period from the date of enactment.

For qualified individual plan participants with existing loans, the due date for any loan repayment by a qualified individual that otherwise would occur from the date of enactment (March 27) through December 31, 2020, is delayed for up to one year. Later repayments for such loan will be adjusted to reflect the prior delayed due date plus any interest accruing during such delay. The one-year delay period for repayments is ignored in determining the five-year maximum loan period.

For purposes of these provisions, a qualified individual who could be eligible for these expanded loan limits and loan payment delays is an individual who could meet the same coronavirus-related tests as discussed above for penalty-free retirement plan distributions.

Required Minimum Distributions

The Act contains a temporary waiver of the RMD rules for certain retirement plans and IRA accounts.  This provision waives, for the 2020 calendar year, RMDs for defined contribution retirement plans (not defined benefit plans) and IRAs. The types of retirement plans covered are: 1) defined contribution 401(a) qualified plans, which include 401(k) and profit sharing plans; 2) defined contribution 403(a) and 403(b) plans; and 3) governmental defined contribution 457(b) plans.  The Act also includes special rules regarding the waiver period to, in essence, hold harmless those individuals (and plans) who took advantage of the RMD waiver for 2020.

If an RMD has already been made in 2020 that would have qualified for the waiver and it is still within the 60-day time period from the date of the RMD, the distribution can be rolled back into a qualified plan or IRA to avoid taxation in 2020.

Single-Employer Defined Benefit Plan Funding Delay

The Act provides single-employer defined benefit plans funding relief by giving plan sponsor companies more time to meet their funding obligations by delaying the due date for any contribution, including quarterly contributions, that otherwise would be due during 2020 until January 1, 2021. At that time, contributions due between March 27 (date of enactment) and December 31, 2020 must be contributed to the plan with interest.

Plan Amendments and Other Considerations

Amendments

A plan may be amended immediately to provide for the expanded COVID-19 distributions and loans, but such amendment is not required until the last day of the plan year beginning on or after January 1, 2022. Accordingly, for a calendar year plan, the amendment to the plan document must be made by no later than December 31, 2022. Governmental plans have an additional two years, which for a calendar year plan would be December 31, 2024.

Plan Loans

If a plan sponsor has taken action which, by definition, causes a participant to be eligible for the loan delay, it should consider modifying the plan loan procedures to permit it to suspend loan payments automatically for the duration of the COVID crisis.  Any delayed loan repayments should be properly documented to ensure that such loans are not treated as being in default. Further, amortization schedules will have to be updated to address the loan changes.

Also, if a plan sponsor intends to increase the plan loan maximum thresholds to $100,000 or 100% of the participant’s vested account balance (or some lesser amount and percentage) under their retirement plan in 2020, then they should amend their loan procedures to allow for the increase.

Conclusion

Plan sponsors will need to quickly consider the provisions provided for under the Act and decide which provisions to implement and then communicate these changes to the plan participants.  They will also want to review plan related documentation to determine those changes that should be made currently and those that can be delayed until the end of the remedial amendment period noted above.