CARES Act and its impact on Retirement Plans
Published March 31, 2020
The CARES Act, recently signed into law, includes several key provisions that impact retirement plan participants and plan sponsors. The following FAQs highlight some of the key relief measures.
Defined Contribution Plans
Does the CARES Act address hardship or in-service distribution requests from employees?
Plans may permit in-service coronavirus-related distributions from a participant’s vested account balance without regard to the normal withdrawal restrictions. This relief is offered through December 31, 2020.
These distributions are subject to the followings:
- Limited to $100,000 per tax year, 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 59-1/2 or younger;
- Eligible to be indirectly rolled into an IRA or employer plan within 3 years from the date the distribution is taken;
- Amounts not indirectly rolled into an IRA or employer plan are included in gross taxable income, ratably, over 3 tax years (beginning with the tax year of the distribution), unless the participant elects to include all amounts in a single tax year.
Eligible participants for distributions are defined as:
- Diagnosed with COVID-19;
- A spouse or dependent diagnosed with COVID-19;
- Experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
- Other factors as determined by the Treasury Secretary.
Note: Plan sponsors do not need to verify participant meets criteria above but may rely on participant’s certification for eligibility.
Does the CARES Act allow any changes to loans provisions for participants?
Two types of loan relief are provided as follows:
- Plans may allow eligible participants to take loans up to the lesser of $100,000 or 100% of the participant’s vested account balance for the specified period. This only applies to loans made on or before September 23, 2020 and is only for individuals that meet the same conditions outline in the withdrawals section above.
- Upon the request of an eligible participant, plan sponsors must suspend loan repayments due on outstanding loans that are in good order for a period of up to 12 months. This relief expires on December 31, 2020. The suspension period is to be added to the original loan term when repayments, including accrued interest, resume, regardless of the length of the loan’s original term.
This relief also applies to participants who are furloughed or laid off but whom are still considered active employees.
Does the CARES Act affect Required Minimum Distributions (RMDs)?
Since an RMD is calculated using the balance of the participant’s retirement account on December 31st of the prior year, the recent significant decrease in the stock market could lead to a disproportionate RMD relative to the current account value. As a result, qualified 401(a)/(k), 403(b), and governmental 457(b) plans will not be required to make any RMD payments for 2020; specifically:
- Participants who turned age 70½ prior to 2019 will not be required to receive an ongoing RMD for 2020;
- Participants who turned age 70½ in 2019 and 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 subject to the five-year distribution rule may extend their required distribution by one year (full distribution of the account must be made by the 6th anniversary of the participant’s death).
If a 2020 RMD is provided to any of the above, 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.
Did the IRS extend the March 30, 2020 deadline for 403(b) Plan Documents?
The IRS is extending the last day of the initial remedial amendment period for Section 403(b) plans from March 31, 2020, to June 30, 2020. Plan sponsors now have until June 30, 2020, to update their pre-approved and individually designed 403(b) plan documents.
Will I need to amend my Plan if I utilize any of the CARES Act provisions?
This legislation permits retirement plans to adopt these rules immediately, even if the plan does not currently allow for in-service distributions, hardship distributions or loans. Plan Sponsors of non-governmental plans have until the last day of the plan year beginning in 2022 to amend their plans, i.e., December 31, 2022 for a calendar year plan. Sponsors of governmental plans have until the last day of the plan year beginning in 2024 to amend their plans.
Are these CARES Act provisions mandatory?
Companies are not required to adopt these provisions for their Retirement Plan. You may also choose to add individual provisions without adding all. For example: You may add the increased loan provisions and not add the in-service or hardship distribution provisions in the Act.
Defined Benefit Plans:
Does the CARES Act provide funding relief for Defined Benefit Plans?
Single employer defined benefit plans are given more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier would be due with interest. The relief applies to quarterly contributions and any year-end contributions, regardless of plan year. When paid, contributions will include interest for late payment at the plan’s effective interest rate for the plan year to which the contribution relates.
Does the CARES Act affect benefits in a Defined Benefit Plan?
When determining whether Section 436 benefit restrictions apply to any plan year that includes the 2020 calendar year, sponsors can choose — but are not required — to use the plan’s adjusted funding target attainment percentage (AFTAP) for the plan year ending in 2019. This relief could help sponsors avoid freezing benefits and continue to offer lump sums and other accelerated payment forms in 2020, even if the plan’s funded status has significantly declined in the wake of the pandemic.
Congress continues to work on additional funding relief and has recently released several changes impacting defined benefit plans. However, additional relief measures may be contained in possible Phase 4 coronavirus legislation by early April. This relief will likely delay the impact of the current economic situation and allow plan sponsors to make lower contributions than they would have otherwise, but it likely will not permit sponsors to eliminate their long-term obligations. In other words, it will delay the impact of the current market conditions in hopes that the market will rebound after the coronavirus is under control.
We’re here to help.
The MCM COVID-19 Solutions Group is committed to keeping you informed on how new legislation impacts your retirement plans. Please contact covidHR@mcmcpa.com for more information and a member of the MCM COVID-19 Solutions Group will be in touch.
Nothing in this document should be construed as providing tax advice. Please consult with your own professional tax advisor. In addition, this document represents the information that we have up to the date the presentation was made and cannot be relied upon for additional updates beyond that date.