What is the Effect of the CARES Act on Retirement Plans?

The Coronavirus, Aid, Relief, and Economic Security (CARES) Act was signed into law last week to help boost the economy with funds available for individuals and businesses. The CARES Act also includes several provisions regarding qualified retirement plans such as 401(k) and profit-sharing plans, 403(a) and (b) plans, 457 plans, and IRAs. The provisions are designed to loosen loan and retirement account rules to allow more access to funds for individuals impacted by the pandemic, and suspend the required minimum distribution (RMD) rules to help retirement accounts try to recover from stock market losses. Also included in the bill is funding relief for single-employer defined benefit plans. Here’s a more detailed look at the effect of the CARES Act on retirement plans.

Retirement Plan COVID-19-Related Distributions

Participants may take up to $100,000 in distributions related to COVID-19 from their retirement plan. Normally for individuals under age 60, there is a 10% tax for early withdrawal from retirement plans due to hardship. The CARES Act waives the 10% tax on early withdrawals up to $100,000 from a qualified retirement plan (and IRA) for anyone who:

• is diagnosed with COVID-19;
• has a spouse or dependent diagnosed with COVID-19;
• has financial hardship as a result of being quarantined, furloughed, laid off, reduced work hours, being unable to work due to COVID-19-related child care issues, COVID-19-related closing or reducing hours of a business owned or operated by the individual

The income tax on these distributions can be spread out evenly over three years, or the funds can be repaid tax-free back into the plan over the next three years. Plan administrators are not required to request or review evidence or documentation to approve the distribution – employee certification is all that is needed.

Plan Loan Amounts

Retirement plan loans are currently maximized at either $50,000 or 100% of the individual’s vested balance, whichever is less. The CARES Act doubles the current limits from $50,000 to $100,000, from the CARES Act effective date and ending 180 days later. During this time, participants can borrow up to $100,000 or 100% of their accrued benefits, whichever is less.

Additionally, participants can delay their retirement loan repayment(s) for up to one year, if their repayment amount is due during the period of the CARES Act enactment through December 31, 2020. The 5-year maximum limitation that usually applies to these loans can now also be extended for up to one year.

NOTE: Retirement plans can adopt these rules immediately, even if the plan doesn’t currently allow for hardship loans, as long as the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022.

Temporary Waiver of Required Minimum Distributions

For participants who were required to receive minimum distributions from retirement accounts in 2020, the CARES Act waives these RMDs for defined contribution plans, including 401(k), 403(b), 457(b), and IRAs. Normally, individuals generally must begin taking RMDs from their retirement plans and/or IRAs upon reaching age 72.

For participants who turned 70 ½ (when they are required to start receiving RMDs prior to the effective date of the SECURE Act) by December 31, 2019 and have postponed their first RMD until April 1, 2020, their distributions are also waived for 2020.

Rules for Single-Employers

Sponsors of single-employer defined benefit plans are permitted more time to make minimum funding contributions that were due in 2020. That deadline is now extended until January 1, 2021, although interest will be owed by plan sponsors on the delayed contributions.

The legislation also provides that as of December 31, 2019, a plan’s benefit restrictions funding status will apply throughout 2020 so plan sponsors can choose to use the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020 for any plan years that include the calendar year 2020.

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