Retirement Plan Provisions under the CARES Act
The CARES Act includes retirement plan provisions that allow plan administrators to provide penalty-free distributions, increased loan amounts to provide greater relief for those affected by COVID-19, as well as provisions employers can take if they have been impacted during this crisis. Some of these provisions are outlined below.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27, 2020, there is a provision allowing plan participants to access money in their retirement plans more easily and at larger amounts than normal loan limits without penalty. There are also options to defer existing loan payments. These provisions provide participants with additional ways to ease short-term financial burdens.
To qualify for these relief options, a plan participant must meet one of the following criteria:
1. The individual, spouse or dependent(s) have been diagnosed with COVID-19, or
2. The participant has experienced a financial burden as a result of an employment status change or inability to work due to a loss of child care related to the virus.
Participants can self-certify that they meet the qualifications for a penalty-free distribution.
Here are a few of the key provisions specific to plan sponsors/employers and plan administrators as they relate to employee retirement plan distributions, existing loans and employer contributions.
Retirement Plan Provisions for Plan Administrators
- Penalty-free distributions up to $100,000 are allowed until December 30, 2020. These distributions would not be subject to the 10% penalty normally assessed on early withdrawals. The participant has three years from the date of distribution to re-contribute the amounts to an eligible retirement plan in order to avoid paying income taxes on the distribution. Eligible plans include qualified 401(k) plans, IRAs, 403(b) plans and governmental 457(b) plans. The participant is not required to redeposit this distribution. This distribution is allowed in addition to other eligible distributions.
- Loan limits are increased from $50,000 to $100,000 to provide participants with the option to access additional funds beyond the distribution. The amount allowed is up to $100,000 or 100% of the vested value, whichever is less.
- Payments on qualified existing loans can be deferred for up to one year (starting the clock from the enactment date through December 31, 2020), and the maturity of the loan extends the same period as the deferment of the repayments. It is important to note that interest continues to accrue during the deferment period. Plan administrators must make sure that the participant is not placed in default during the deferment.
- For 2020, required minimum distributions (RMDs) are waived to prevent requiring participants to liquidate undervalued investments. This provision is not dependent on participants being directly affected by COVID-19. If an RMD has already occurred, participants may be able to roll the RMD into an IRA or other qualified plan, but additional guidance is pending on this option.
Retirement Plan Provisions for Employers/Plan Sponsors
- The deadline for employer contributions to qualified defined contribution retirement plans has been extended to July 15, 2020 (from April 15, 2020). For defined benefit plans, the due date for required contributions in 2020 has been extended to January 1, 2021.
- Suspending employer contributions for 401(k) matching, profit sharing and/or safe harbor contributions may be an option. If employer contributions are considered discretionary, they may be immediately suspended. If the employer contribution is based on a rate or formula, the plan documents would require amending prior to the last day of the plan year before suspending contributions.
- Safe harbor contribution suspension is subject to the “maybe not” language in the plan document. It is important to review this document and consult with your plan service provider before proceeding.
- Partial plan termination may be triggered if there has been at least a 20% reduction in the workforce. Partial termination would require that the plan fully vests all participants that are affected.
Keep in mind that the choice to participate in some of these provisions as a plan sponsor is optional. However, plan sponsors/employers should review these CARES Act relief measures and their plan documents thoroughly. There are decisions that need to be made quickly, and proper communication to participants will be necessary so they are informed of their options. Further guidance will continue to be issued in the days and weeks to come.
Here at DS+B, we are committed to providing you with proactive communications to help you understand and navigate your options available through the CARES Act. You can follow our firm on LinkedIn and Twitter to receive updates as they are made available.
Stay up-to-date on tax and accounting impacts of the coronavirus through our COVID-19 Clarity Center.