The Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law in late March is a massive piece of legislation that’s more than 880 pages long and carries a price tag of at least $2 trillion.
The Act contains a number of provisions that affect pensions and qualified retirement plans. Following is an overview of the CARES Act provisions you should be aware of as a retirement plan sponsor.
Penalty-Free Retirement Plan Distributions
Qualified individuals who have been affected by COVID-19 are exempted from the normal 10 percent penalty that applies to early withdrawals from their retirement account. This exemption applies to withdrawals of up to $100,000 made during the 2020 calendar year.
Plan participants will qualify for one of these coronavirus-related distributions if at least one of the following conditions applies:
- The individual, or his or her spouse or dependent, tested positive for COVID-19.
- The individual is experiencing adverse financial consequences due to being quarantined, furloughed, laid off, or otherwise unable to work due to COVID-19.
- The individual is unable to work due to childcare issues related to COVID-19.
- The individual owns a business that has been forced to close or reduce its hours due to COVID-19.
Note that adoption of this provision is optional for plan sponsors. You can rely on the plan participant’s certification as proof that he or she qualifies for a coronavirus-related distribution due to one of these factors.
Participants can re-contribute funds to their plan (or another retirement plan) within three years of taking the distribution without regard to annual plan contribution limits. If they don’t recontribute funds within this time, they can spread out the payment of taxes on the distribution (without penalty) over three years.
Increased Plan Loan Limits
The CARES Act doubles the amount of money that qualified plan participants can borrow from their retirement plan from $50,000 to $100,000, assuming their plan allows loans. This provision applies for loans taken out during the 180-day period after March 27, 2020.
Participants can delay repayment of plan loans that are due through the end of this year for up to one year. Later repayments will also be adjusted as appropriate to reflect the prior delayed due date plus any interest that accrues during the delay. Adoption of this provision is also optional.
Suspension of RMDs for 2020
The SECURE Act legislation signed late last year raised the age for taking required minimum distributions (RMDs) from traditional IRAs and 401(k)s from 70.5 to 72. The CARES Act has taken this further by suspending all RMDs for 2020, including from inherited accounts.
As a result, account owners who normally would have been required to take RMDs this year will no longer have to do so. This could benefit participants whose retirement investments have lost value due to the stock market correction as it will allow their portfolios to potentially recover if markets rebound later this year.
The suspension of RMDs applies to owners of the following types of retirement accounts:
- Profit sharing and money purchase pension plans
- Traditional 401(k) plans
- 403(a), 403(b), and 457(b) plans
- Traditional IRAs
If participants have already taken an RMD for this year, they can generally roll these funds back into their account or another retirement account and eliminate the tax bill. While this is technically allowed for RMDs taken between January 1 and April 1 of this year, the 60-day deadline for rolling over assets after their distribution effectively limits it to RMDs taken after January 31.
Delay of Contributions for Defined Benefit Plans
If you sponsor a single employer pension plan, you would normally be required to make quarterly contributions to the plan. However, the CARES Act allows you to defer these contributions with interest until January 1, 2021.
Note: You can use the funding percentage for the 2019 plan year instead of the 2020 plan year to help avoid benefit restrictions.
Steps to Consider
Now is a good time to review your plan’s procedures to determine if any changes are required to implement these provisions. Pay especially close attention to the following areas:
• You will need to create a new distributive event that’s not subject to the 10 percent early distribution penalty or mandatory 20 percent withholding for participants to make penalty-free retirement plan distributions. Also, if you offer multiple plans, you should ensure that the aggregate amount of distributions taken by any one participant doesn’t exceed $100,000.
• If participants are going to repay penalty-free distributions to their accounts, you should treat these repayments as rollover contributions.
• You must allow for the increased plan loan limits if you intend to allow this.
• Delayed loan payments should be properly documented so they aren’t treated as being in default.
• Consider whether now is a good time to allow plan loans if your plan currently doesn’t permit them.
• If your plan does permit loans, update loan procedures and amortization schedules to reflect changes in the loans.
In addition, you should prepare and distribute communication materials to inform participants about any plan operational changes resulting from the CARES Act. These materials should also let participants know about any additional steps required to benefit from these changes.