APRIL 1, 2020
COVID-19: CARES ACT – RETIREMENT PLAN PROVISIONS
On March 27, 2020, President Donald Trump signed the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) into law. The law contains a number of provisions that deal directly with retirement plan benefits.
These relief provisions apply only with respect to “Qualified Individuals” defined as those (1) diagnosed with coronavirus disease by a test approved by the CDC, or who have a spouse or dependent who is diagnosed with coronavirus disease in this manner, or (2) who have experienced adverse financial consequences as a result of being quarantined, furloughed, or having work hours reduced due to the virus, being unable to work due to lack of child care due to the virus, or the closing or reduced hours of a business owned by or operated by the individual as a result of the virus or “other factors” to be set out in future guidance.
THE CARES ACT PERMITS QUALIFIED INDIVIDUALS TO:
- Withdraw vested benefits up to $100,000 from most qualified retirement plan, a 403(b) plans, 457(b) plans or an IRAs during 2020. Such distributions will not be subject to the ten percent tax on early distributions which are generally in-service distributions made to those under age 59-1/2. The amount of any such distributions can be re-contributed back to the plan by the participant within three years of the distribution in order to avoid otherwise applicable income tax. Any income tax that is payable with respect to such distribution can be spread over three annual installments.
- Retirement plans may permit Qualified Individuals to take out plan loans in excess of the currently applicable maximum amounts (50 percent of the present value of the individual’s vested benefit up to $50,000). The CARES Act maximum for Qualified Individuals is 100 percent of the present value of the individual’s vested benefit up to $100,000 and applies to loans made within 180 days of the March 27, 2020 date of enactment of the CARES Act.
- With respect to any Qualified Individual with an outstanding participant loan, any repayment due between March 27 and December 31, 2020 is delayed for one year with appropriate adjustment for interest accruing during such delay.
- There is a relief provision that permits retirees and others subject to the required minimum distribution (“RMD”) rules to skip their RMDs for 2020 unless they have already been made. This applies to RMDs from defined contribution retirement plans, 403(b) plans and IRAs (other than inherited IRAs which are still require to make the RMD for 2020) and is not limited to Qualified Individuals. This provision is intended to afford some financial protection to individuals subject to 2020 RMDs based on December 31, 2019 valuations when the stock market indices have since declined by more than 20 percent.
The CARES Act allows the immediate implementation of these relief provisions even if the retirement plan in question does not currently permit hardship distributions or participant loans. However, suitable plan amendments must be adopted for non-governmental plans by the end of the first plan year beginning on or after January 1, 2022.
For concerned employers, a first step will be investigating and undertaking initial employee communications about any CARES Act relief provisions to be implemented. In the absence of much official guidance on how to proceed, it is important to work closely with the professional advisors who are best positioned to assist so that your chosen relief program can be documented and made available to employees while the coronavirus pandemic continues.