The Coronavirus Aid, Relief and Economic Security Act or CARES Act, signed into law on March 27, 2020, includes many employment and employee benefit plan provisions. Set forth below is a summary of the significant changes that sponsors of qualified retirement plans should know regarding this new law.
Coronavirus-Related Distributions
The CARES Act defines a new type of distribution from an IRA or employer retirement plan (such as profit sharing, 401(k), 403(b) and governmental 457(b) plan), which employers may add as a new distribution option. Eligible participants may receive coronavirus-related distributions of up to $100,000 from their employers’ retirement plans. The $100,000 limit is applied on a controlled group basis.
For this purpose, a “coronavirus-related distribution” is a distribution made:
- on or after January 1, 2020 and before December 31, 2020; and
- to a “qualified individual.”
A “qualified individual” is an individual
- who is diagnosed with COVID-19;
- whose spouse or dependent is diagnosed with COVID-19; or
- who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors determined by the Treasury Secretary.
The plan administrator may rely on a participant’s certification he or she is a “qualified individual.”
A “coronavirus-related distribution” enjoys a number of special federal tax relief provisions:
- waiver of the 10 percent early distribution penalty that usually applies to distributions made to an employee prior to attaining age 59½;
- waiver of the 20 percent federal income tax withholding on eligible rollover distributions;
- the ability to recontribute up to the entire amount of the coronavirus-related distribution to a qualified retirement plan within three (3) years of receiving the distribution whereby recontributed coronavirus-related distributions are to be treated in the same manner as a rollover contribution; and
- the ordinary income taxes on the distribution are spread ratably over a 3-year period, unless the participant elects otherwise.
Plan Loan Provisions
The CARES Act includes the following special relief for retirement plans that permit participant loans:
- The maximum amount a participant may borrow in a new loan from the vested portion of a participant’s account is temporarily increased. The current $50,000 limit increases to $100,000 and the 50 percent limit is increased to 100 percent of the participant’s account balance. These plan loan limit increases are in effect for 180 days after March 27, 2020.
- For any “qualified individuals” (as defined under the “coronavirus-related distribution” rules), the due date of any plan loan payment otherwise due between March 27, 2020 and December 31, 2020, is delayed for one year. The loan balance must be adjusted for the interest that accrued during the delay and the loan re-amortized.
Required Minimum Distributions
The CARES Act waives required minimum distributions (RMDs) for calendar year 2020 from defined contribution plans, including 401(k), 403(b), and governmental 457(b) plans, allowing individuals to keep funds in their retirement plan accounts. This waiver does not apply to defined benefit pension plans.
Minimum Funding Requirements and Funding Target for Single Employer Defined Benefit Pension Plans
For single employer defined benefit pension plans, the CARES Act extends the deadline for plan sponsors to make minimum funding contributions that were due in the 2020 calendar year until January 1, 2021. Interest on the unpaid contributions will accrue at the plan’s rate of interest effective when the contribution was otherwise due.
Further, plan sponsors are allowed to utilize the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020, as the plan’s AFTAP for plan years that include the 2020 calendar year. This may provide relief for plan sponsors whose plans may otherwise have benefit restrictions under Section 436 of the Code.
Plan Amendments
Adding a new coronavirus-related distribution option and providing plan loan relief are optional. Plan sponsors may adopt any of these provisions immediately in operation. If adopted, the retirement plan document must be amended on or before the last day of the first plan year beginning on or after January 1, 2022, or a later date provided by the Treasury Secretary. Governmental plans must be amended on or before the last day of the plan year beginning on or after January 1, 2024.
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