The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed unanimously by the U.S. Senate on Wednesday, March 25, 2020. On Friday, March 27, 2020, the U.S. House of Representatives passed the CARES Act by voice vote and President Donald Trump signed the bill into law later that same day.
The $2 trillion stimulus bill is aimed at providing relief for businesses and individuals that have been negatively impacted by the coronavirus. It includes provisions that will change some of the rules for retirement plans, including a new retirement plan distribution option called a “coronavirus-related distribution” or “CRD.” The key retirement plan provisions are highlighted below:
Coronavirus-Related Distributions and Loans
There are two ways that an individual can qualify for a coronavirus-related distribution or loan: (1) the individual requesting a loan or distribution, or their spouse or dependent, must be diagnosed with COVID-19 or (2) if the individual experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, had hours reduced, no available child care, or other factors as determined by the Secretary of the Treasury during the COVID-19 pandemic. The individual will have to self-certify to either of these reasons.
Distributions from Retirement Plans
- The 10% tax penalty for taking early distributions from qualified retirement plans up to $100,000 is waived. This applies to distributions taken between January 1, 2020 through December 31, 2020.
- The mandatory 20% income tax withholding from rollover distributions is suspended during this period and the income taxes on a CRD can be paid over a three-year period.
- Additionally, an individual has up to three years to recontribute the amount to an eligible retirement plan. The three-year period commences on the day after the date on which the CRD was received.
Rules Relaxed for Loans from Retirement Plans
- For 180 days following the enactment (September 23, 2020), the maximum loan amount can be increased to the lower of $100,000 or 100% of the vested account balance.
- Additionally, repayment of new and existing loan obligations, on or after CARES Act enactment through end of year, can be delayed for up to one year. The delay period does not count against the five-year maximum repayment term applicable to plan loans.
Temporary Waiver of RMD Rules
- Required minimum distributions (RMDs) are suspended for 2020, including those for inherited IRAs.
- For those that have already taken a distribution this year have up to 60 days to return it to an IRA or qualified retirement account without owing taxes on it.
- Single employers can delay making pension plan funding contributions due in 2020 until January 2021. At that time, contributions due earlier in the year must be paid with interest.
- Plan sponsors can rely on a plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020, or any other plan years that include part of the 2020 calendar year. This might enable a plan to avoid having to comply with the additional restrictions on benefit payments when the adjusted funding target attainment percentage is below 80% or 60%.
Expansion of DOL Authority to Postpone Certain Deadlines
- The Act amends ERISA Section 518 to give the Department of Labor more leeway to delay filings, such as the Form 5500, and other required ERISA items in response to COVID-19. Employers will need to wait for further guidance from the DOL.
There is a special amendment period for changes under the CARES Act. If a plan sponsor wants to amend its retirement plan to take advantage of changes permitted under the CARES Act, then the plan must be amended for such changes by the last day of the first plan year beginning on or after January 1, 2022.
Recordkeepers will be equipped to respond to these changes. We are seeing different approaches by the recordkeepers as it relates to seeking responses from plan sponsors about the optional CRD provisions, some are requiring plan sponsors to affirmatively elect and in other cases a negative election method is being used. At this early stage, we expect that most Plan Sponsors will choose to move forward with the relief provisions.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.