CARES Act Provisions Impacting Retirement Plans

Categories : Coronavirus

Types : Alerts

On Wednesday, March 25^th, the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) was passed by a unanimous Senate vote and today March 27^th the House also voted on and passed the Act.  President Trump has stated that he would sign the bill quickly after today’s House vote.  Below is a summary of the CARES Act provisions that apply to retirement plans.

Special Distribution Option

The CARES Act will amend the tax code by permitting a penalty free distribution, aptly named a “coronavirus-related distribution.”   This new distribution option ($100,000 maximum) is only available during the 2020 calendar year and only to an individual:

1.  who is diagnosed with the virus SARS-CoV-2 or with the coronavirus disease COVID-19 by a test approved by the CDC;
2.  whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC; or
3.  who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19, closing or reducing hours of a business owned or operated by the individual due to SARS-CoV-2 or COVID-19;  or
4. other factors as determined by the secretary of the Treasury.

An individual meeting these requirements is referred to as a “qualified individual.”  The administrator of a qualified plan can rely on the employee’s certification that he or she meets the requirement to receive a “coronavirus-related distribution.”

The distribution will not be subject to the 10% early withdrawal penalty and will not be an “eligible rollover distribution” which means that mandatory 20% withholding rules will not apply.

Though not subject to the 10% penalty, the distribution is still subject to ordinary income tax which the participant may elect to apply ratably over a three year period.  Additionally, unlike traditional hardship distributions that cannot be repaid, the new rule gives the participant the option to repay the amount taken to the plan within three years.

Temporary Increase in Loan Amounts

The new law increases the maximum loan amount available from a plan to a “qualified individual” to the lesser of $100,000 or 100% of the participant’s vested account balance.

The increased loan amount is only available during the 180-day period starting on the enactment of the CARES Act.  After the 180-day period, the traditional loan amount rules (the lesser of $50,000 or 50% of the participant’s vested account balance) will apply.

Suspension of Required Minimum Distributions

Code Section 401(a)(9) generally requires participants to start receiving benefit payment no later than the April 1 following the calendar year in which they turn 70 ½ (2019 and prior years) or 72 (2020 and beyond) or retirement.  The Act will temporarily waive, for the 2020 calendar year, the required minimum distribution rules for certain defined contribution plans and IRAs. This rule would apply to those who turned 70 ½ in 2019 and are required to take a distribution in April 2020 as well as those individuals who hit the minimum distribution rule in 2020.

Loan Repayment Extension

The Act would provide a one-year extension of time to repay a plan loan for qualified individuals if the due date occurs between the date the Act is enacted and December 31, 2020. Any remaining payments, plus applicable interest, can be re-amortized over the extended period. It is unclear whether a loan recipient can opt-out of the loan extension.

Delay in Minimum Funding Contributions

The CARES Act allows pension plans that are required to make minimum contributions (including quarterly contributions) in 2020 to delay those payments until January 1, 2021. If the plan sponsor decides to delay the contributions, the contributions will accrue interest (at the plan’s effective interest rate) from the original due date to the delayed deposit date.

The CARES Act also permits a plan sponsor to elect to treat the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020 as the AFTAP for calendar year 2020 in order to avoid potential funding based restrictions of Code Section 436.

Plan Amendment Deadline

Once enacted, plans will have until the end of the plan year beginning on or after Jan. 1, 2022, to adopt a retroactive amendment to incorporate the changes (December 31, 2022 for calendar year plans).  The CARES Act also provides that plans will not be treated as failing to meet the anti-cutback rules of Code Section 411(d)(6) or Section 204(g) of the Employee Retirement Income Security Act of 1974 (“ERISA”) by reason of such amendment. Governmental plans would have an additional two years to adopt the amendment.

Montgomery McCracken attorneys are available to assist clients with numerous issues related to COVID-19. Montgomery McCracken’s COVID-19 Resource Center is available here.