4 key CARES Act provisions for retirement plan sponsors

On March 27, President Trump signed the Coronavirus Aid, Relief and Economic Security Act, legislation intended to provide relief to Americans amid the coronavirus pandemic. In addition to emergency provisions including financial stimulus payments to qualifying Americans, the Act provides certain relief within retirement plans to participants and plan sponsors. Specifically, the Act provides for the following:

1. Coronavirus-related distributions. Before December 31, 2020, IRA holders and participants in defined contribution plans can withdraw up to $100,000 as a “coronavirus-related distribution.” To qualify, one must have been diagnosed with COVID-19, had a spouse or dependent diagnosed, or experienced adverse financial consequences due to virus-related work reduction. The law refers to such financial consequences as those resulting from being quarantined, 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 as determined by the Secretary of the Treasury. Participants can self-certify their eligibility. Administratively, the $100,000 limit applies across all plans of the employer or controlled group.
   
   Update: Among other important clarifications for plan sponsors and individuals, the IRS guidance released on June 19 expands the availability of coronavirus-related distributions and loan relief. Qualification now extends to those with reduced pay, a rescinded job offer, or a delayed start to a new job due to COVID-19. It also extends to those whose spouse or fellow household member has suffered certain financial effects from COVID-19, including impacts to a business owned or operated by that person.
   
   The standard 20% federal tax withholding does not apply to these distributions; nor does the 10% excise tax penalty on early withdrawals before age 59 ½. Taxation of these distributions can be spread over three years, or repaid or rolled over within the same time period without violating contribution limit rules.
   
   Adoption of this provision is optional. For plans that choose to adopt the provision, plan documents will need to be amended by the last day of the plan year beginning on or after Jan. 1, 2022.
   
   
2. Loan relief. Until September 22, 2020, the maximum loan available for a participant in a defined contribution plan is increased for the next 180 days from 50% of one’s vested balance up to $50,000, to 100% of one’s vested balance up to $100,000 for individuals meeting the criteria outlined above for coronavirus-related distributions. Additionally, repayments on outstanding loans due between now and the end of the year can be delayed one year. The loan term can be extended accordingly and interest will continue to accrue.
   
   Adoption of this provision is optional. For plans that choose to adopt the provision, plan documents will need to be amended by the last day of the plan year beginning on or after Jan. 1, 2022.
   
   
3. Suspension of required minimum distributions. The requirement for participants to receive RMDs from defined contribution plans and IRAs in 2020 has been suspended.
   
   Update: IRS guidance released on June 23 extends the 60-day rollover period through August 31, 2020 for RMDs issued in 2020. This provides an avenue for individuals to defer taxation on RMDs issued before the CARES Act was enacted. The guidance also allows 2020 RMDs to be repaid to the source IRA or defined contribution plan, subject to plan terms.
   
   
4. Defined benefit plan funding and benefit restriction relief. Sponsors of defined benefit plans can delay required contributions for 2020 until Jan. 1, 2021. They can also elect to maintain their 2019 adjusted funding target attainment percentage, if favorable, to help avoid benefit restrictions. 

Plan sponsors should check with their record keepers as to how the optional provisions are being implemented. Some record keepers are using an “opt-in” approach where plans have to affirmatively elect to adopt the changes; other record keepers are using an “opt-out” approach where the changes will be automatically put into effect unless a plan affirmatively elects not to.

While retirement plans are intended for retirement, it’s important that those in dire financial situations have some options in this unprecedented time. If you would like to speak with a consultant at HANYS Benefit Services on this or any other topic, please call (800) 388-1963 or email hbs@hanys.org.