By Jeremiah D. Wood, Alexandra A. Ifrah, Joshua M. Osborne and Brian C. Smith
The CARES Act provides significant assistance to individuals and businesses impacted by COVID-19. This alert is focused specifically on the CARES Act’s impact on retirement plans.
Coronavirus Related Distributions
The CARES Act provides a special distribution option for specific individuals. This coronavirus-related distribution is exempt from the prohibition on premature distributions (i.e., prior to age 59 ½ or termination of employment), and thus is exempt from the 10 percent excise tax on such distributions. The distribution is limited to $100,000 from the plans of the sponsoring employer and any member of its controlled group. This coronavirus-related distribution is available to IRAs and plans described in Internal Revenue Code (Code) sections 401(a), 401(k), 403(a), 403(b), and 457(b).
Only the following individuals are allowed to use this new coronavirus-related distribution:
- individuals who have been diagnosed with SARS-CoV-2 or coronavirus disease 2019 (i.e., COVID-19) by a test approved by the Centers for Disease Control,
- an individual whose spouse or dependent has been diagnosed with one of these viruses by the same approved test, or
- an individual who experiences adverse financial consequences as a result of quarantine, furlough, lay off, reduced working hours, closing or reducing hours of a business owned or operated by the individual, or who is unable to work due to lack of child care all as a result of such viruses or other factors determined by the Secretary of the Treasury.
The plan administrator is allowed to rely on a certification provided by the individual that they are a covered individual. Amounts distributed pursuant to the coronavirus-related distribution may be repaid at any time over the three-year period commencing on the date the distribution was received (and there is no requirement that the repayment occur at one time). Amounts can be paid back to any qualified plan or any IRA so long as the account being paid back is one to which a rollover contribution could be made under the Code. The income inclusion with respect to these coronavirus-related distributions will be included ratably over a three-year period beginning with the year in which the distribution was received, unless the participant elects to treat it all as income during the year of receipt. These distributions will be treated as exempt from tax withholding and exempt from the trustee-to-trustee transfer rules, which require a plan to offer a trustee-to-trustee transfer to participants taking distributions.
Retirement Plan Loans
In addition, the CARES Act increases the dollar amount available for loans from qualified plans from $50,000 to $100,000 and increases the percentage test limit for loans from 50% of the present value of the participant’s vested account/benefit to 100 percent of the present value of the participant’s vested account/benefit under the plan. Such increases are only for loans made 180 days from the date of the enactment of the CARES Act. Additionally, if any loan repayments are due between the enactment of the CARES Act and December 31, 2020, such repayments may be delayed for one year from the original due date. This delay applies to loans outstanding prior to the enactment of the CARES Act and to loans that are initiated after the CARES Act. After December 31, 2020, loan repayments must be adjusted to reflect the delay in the repayments and for any interest accrued during that delay.
The five-year limit that typically applies to loan repayments disregards this one-year delay. The individuals allowed to take advantage of this delay in loan repayments are only those individuals discussed above who are allowed to take a coronavirus-related distribution.
Delay in Required Minimum Distributions
The CARES Act provides for a one-year delay of required minimum distributions (RMDs) for the following defined contribution plans:
- 401(a) plans (including 401(k) plans),
- 403(a) and 403(b) plans,
- 457(b) plans, and also
- IRAs.
This RMD delay does not apply to defined benefit plans. The delay applies to both 2019 RMDs that are required by April 1, 2020 and to 2020 RMDs. Similar to the 2009 waiver of RMDs, if all or a portion of a distribution for 2020 is an eligible rollover distribution because it is no longer an RMD the distribution is not treated as an eligible rollover distribution for purposes of the direct rollover requirement, the notice and written explanation of the direct rollover requirement, and the mandatory income tax withholding requirement.
Delay in Required Minimum Funding Contributions
The CARES Act delays minimum funding contributions for qualified plans, which mostly affects defined benefit plans, including any required quarterly contributions until January 1, 2021. The amount of any delayed minimum required contribution will be increased by interest accruing during the period from the original due date until the payment date using the effective rate of interest for the plan for the plan year in which the payment is made.
Amendments for the CARES Act Provisions
The plan only needs to be operated as if the amendment was in place, and the actual amendment, which would be retroactive, is not required until the following:
- the last day of the plan year beginning on or after January 1, 2022; and
- for governmental plans, the last day of the plan year beginning on or after January 1, 2024.
- Unless otherwise specified, these provisions apply for calendar years beginning after December 31, 2019, and this allows participants who may have already taken a distribution the benefit of the provisions.
Deadlines Extended
Finally, the CARES Act expands the circumstances under which the Secretary of Labor can postpone certain filing deadlines. There have been requests for the Secretary of Labor to postpone filing deadlines applicable to retirement plans, but as of March 29, 2020, there have not been any postponements. However, the IRS has extended the initial remedial amendment period for Section 403(b) plans from March 31, 2020, to June 30, 2020, and the deadline for employers to adopt or amend a pre-approved defined benefit plan and to submit a determination letter application from April 30, 2020 to July 31, 2020.
Jeremiah D. Wood practices in the firm’s Employee Benefits and Executive Compensation Practice Group. His practice includes experience in the design, implementation, administration and termination of tax-qualified retirement plans (including traditional pension plans, cash balance plans, profit sharing plans, 401(k) plans, and ESOPs), 403(b) plans, nonqualified deferred compensation plans (including 457(b) and 457(f) plans and deferral compensation arrangements for executives) and health and welfare plans.
Alexandra A. Ifrah is a partner in the Employee Benefits Practice Group of Friday, Eldredge & Clark and serves on the firm's Management Committee. Since joining the firm in 1999, Alexandra has concentrated her practice on the representation of employers from a myriad of industries in complex employee benefits, taxation and executive compensation matters.
Joshua M. Osborne is a partner in the firm’s Employee Benefits and Executive Compensation Practice Group. His practice focuses on providing counsel to clients on all aspects of their welfare benefits, retirement plans and executive compensation arrangements.
Brian C. Smith practices in the firm’s Employee Benefits and Executive Compensation Practice Group. His practice includes experience in the design, implementation and administration of tax-qualified retirement plans including defined benefit pension plans, profit sharing plans, 401(k) plans and ESOPs.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.