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Adoption and Usage of CARES Act Provision

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress with overwhelming, bipartisan support and signed into law by President Trump on March 27th. The $2 trillion plus economic relief package was designed to help protect Americans from the economic impacts of COVID-19. Included in the legislation are four provisions that relate to retirement plans:

  • Retirement plans may be amended to allow for Coronavirus Related Distributions (CRDs). CRDs of up to $100,000 are permitted to be taken by eligible participants through year-end and are exempt from the 10% early withdrawal penalty (for those under age 59 ½). In addition, participants have the option of spreading the federal income tax on the withdrawal over 3 years or may repay the distribution as a rollover within the same time period.
  • Plans that offer loans are allowed to double the loan limit for eligible participants to the lesser of $100,000 or 100% of their vested balance. The rule permitting the increased loan limit sunsets 180 days following the date of enactment (September 23, 2020).
  • Eligible participants may delay any loan payments that are due between March 27, 2020 and December 31, 2020 for up to one year. Interest would continue to accrue, the loan would be re-amortized, and the term of the loan would be extended by the period of the suspension.
  • Required Minimum Distributions (RMDs) for affected participants over age 70 ½ are waived for 2020. Many recordkeepers have suspended these automatic payments for the remainder of this year but allow payments to be made at a participant’s request.

Working with our clients and the major retirement plan recordkeepers, we can offer some insight as to how plan sponsors and affected plan participants have responded to the CARES Act provisions.

General Plan Sponsor Adoption:
Across the major recordkeepers we surveyed, the plan sponsor adoption rate of the increased loan limit (47%) was much lower than the adoption rate for CRDs (70%).

The repayment burden and the potential taxation participants face at termination (if the loan cannot be repaid) may explain some of the reluctance plan sponsors have in allowing the increased loan limit.

The majority of plan sponsors (71%) allowed participants to suspend their loan repayments through year-end.

A Look Across Plan Size and Industries:
We found that adoption of the CARES Act provisions by larger employer cohorts was greater than smaller employer cohorts. Among plans with more than 10,000 participants, 83% have adopted CRDs, compared with only 16% of plans with less than 1,000 participants.

Source: T. Rowe Price.

Comparing nine different industries, plan sponsors in the Leisure and Hospitality industry were the most likely to offer the various provisions of the CARES Act.

Source: T. Rowe Price.

Participant Usage:
Overall participant use of CRDs was very moderate, with most industries seeing usage of 2% or less. The Retail Trade industry saw the highest participant use of CRDs at 9.1%, perhaps due to the slowdown in retail business driven by the shelter-in-place orders.

Source: T. Rowe Price.

Across the recordkeepers we canvassed, we found similarly very modest use of Coronavirus-related in-service withdrawals and loans, with less than 2.0% usage for each.

The average dollar amount taken remains low, and very few participants are making use of the $100,000 limit for CRDs and loans.

Transactional Activity following CARES Act Enactment

% Utilization Average Amount
Distributions 1.90% $19,583
Loans 0.56% $27,329