CARES Act – Retirement Plan Impact
Posted on March 31, 2020 by Legacy Retirement Solutions
The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES”) Act was signed into law on March 27, 2020 (“Date of Enactment”). It has enacted numerous economic relief measures intended to assist businesses and individuals as they deal with the broad impact of COVID-19. This article is intended to focus upon the impact that the CARES Act will have on tax-qualified retirement plans.
As with most legislation, initial efforts must be focused upon attaining a simple understanding of the drafters’ intentions. However, in between initial understanding and actual implementation often lie both practical and procedural challenges. The CARES Act is no different in this respect as the implementation of certain of its provisions will require additional guidance from the Internal Revenue Service (“IRS”) as well as modifications to retirement plan industry service providers’ current processes. Thus, it is important that everyone exercises patience (and caution) while implementing the applicable provisions of the CARES Act in order to avoid creating unintended consequences …. such as future compliance issues.
Despite the need for additional guidance on certain items discussed below, all of the retirement plan related provisions of the CARES Act were immediately effective upon its enactment.
One of the most impactful provisions of the CARES Act is that it grants plan sponsors with the discretion to offer a new tax-favored form of participant distribution (“Coronavirus Distribution(s)”) from any “eligible retirement plan” which includes 401(k) plans, profit sharing plans, 403(b) plans and “individual retirement accounts” (“IRA(s)”). Coronavirus Distributions will be available only during the 2020 calendar year for, in aggregate, no more than $100,000 per participant. Such distributions will not be subject to the 10% early withdrawal penalty tax that might otherwise apply to retirement plan distributions made prior to the attainment of age 59-1/2. In addition, such distributions are not eligible for direct rollover to another retirement plan and are not subject to mandatory 20% federal tax withholding. However, 10% withholding will apply unless the participant elects a different withholding percentage.
The amount of any Coronavirus Distribution will be included in the taxable income of the recipient ratably over a three-year period. In addition, once distributed, the amount of any Coronavirus Distribution may, in general, be repaid by the Participant receiving such distribution back to any eligible retirement plan that he or she is eligible to participate in. Presumably, since the distributed amount would have already been at least partially taxed by the time a repayment would be made, repayment will result in a current deduction for the taxpayer in relation to the amount of any such repayment.
Coronavirus Distributions may only be made available to participants:
1) who are diagnosed with COVID-19 by a test approved by the Center for Disease Control;
2) whose spouse or dependent is diagnosed with COVID-19 by a test approved by the Center for Disease Control; or
3) who experience adverse financial consequences as a result of being quarantined, furloughed, laid off or forced to work reduced hours due to COVID-19; who are unable to work due to a lack of available child care resulting from COVID-19; who experience a closure or reduction in hours of a business owned or operated by the participant due to COVID-19; or who are subject to other factors as may later be determined by the Secretary of the Treasury.
Unfortunately, it is not currently clear what, if any, documentation may be necessary to substantiate the “impact” items described above. However, notwithstanding this current lack of clear guidance, plan sponsors are permitted to rely on participants’ assertions that they have been impacted by COVID-19 and, therefore, entitled to a Coronavirus Distribution. Thus, with the proper disclosures and participant executed forms, plan sponsors should be able to avoid any potential liability for determining whether a participant is eligible for a Coronavirus Distribution.
Finally, it is notable that the Coronavirus Distribution is not merely the creation of another set of circumstances under which a hardship withdrawal may be granted. Although certain participants may be eligible to receive a hardship withdrawal due to their personal experiences in relation to the COVID-19 pandemic, such hardship distributions would remain subject to the “normal” hardship withdrawal rules. This means that, unlike the new Coronavirus Distributions, hardship withdrawals would potentially remain subject to the 10% early withdrawal penalty tax, could not be repaid to a tax-deferred retirement vehicle and could not have their tax impact spread over three separate tax years. Thus, it appears that there are significant advantages to receiving a Coronavirus Distribution rather than a hardship withdrawal.
Increased Loan Limits
The CARES Act also increases the maximum amount of a loan that certain participants may receive from qualified or 403(b) plans eligible to offer participant loans. More specifically, the general rule restricting plan loans to the lesser of $50,000 or 50% of the participant’s nonforfeitable account balance is increased to the lesser of $100,000 or 100% of the participant’s nonforfeitable account balance. This increased limit applies to loans taken within 180 days of the Date of Enactment.
In addition to the increased maximum loan amount, the CARES Act also extends the due date for repaying a participant loan. In this regard, the due date for any loan repayment which becomes due from the Date of Enactment through December 31, 2020 is delayed by one year. Any subsequent payment of a delayed loan repayment amount is required to accrue interest during such delay and such delay is to be ignored for purposes of complying with the five year loan repayment term limit that otherwise applies to most participant loans.
Finally, the availability of the participant loan relief described above is conditioned upon the borrower being impacted by COVID-19 in one of the manners described above in conjunction with Coronavirus Distributions. Thus, only those participants (and their spouses and dependents) who are diagnosed with COVID-19 or that experience adverse financial consequences as a result of COVID-19 will be eligible for these more favorable participant loan requirements. Of particular note here, the exception granted above under the Coronavirus Distribution provisions with respect to accepting a participant’s self-certification that he or she has been impacted by COVID-19 was not specifically referenced within the participant loan provisions of the CARES Act. While this was likely an unintended omission, it is relevant that it appears that a plan sponsor is not authorized to solely accept a participant’s self-certification that he or she was impacted by COVID-19 in order to allow such individual to receive a larger loan amount or a more favorable loan repayment term. Thus, until additional guidance is provided on this provision of the CARES Act, plan sponsors should be particularly cautious when attempting to implement it. Presumably, this would mean heavily documenting any loan granted under the CARES Act guidance in order to substantiate the availability of this exception to the general rule.
Notwithstanding the concerns expressed above about who may be eligible for loan related COVID-19 relief, remember that, independent of the CARES Act, a plan sponsor can allow for the suspension of loan repayments for up to one year in the event of a participant incurring an unpaid leave of absence or a situation where the participant is being paid less than the loan repayment amount. This provision is something that may become more important to plan sponsors in the context of participants who are furloughed or who experienced reduced work hours.
Waiver of 2020 Required Minimum Distributions
The CARES Act also waived all “required minimum distributions” (“RMD(s)”) that might otherwise be required for all tax-qualified plans, 403(b) plans, governmental 457(b) plans and IRAs. This waiver applies in relation to any RMD required to be paid during the 2020 calendar year and includes 2019 RMDs that are required to be distributed by April 1, 2020. Finally, for purposes of determining RMDs that become due after 2020, an individual’s required beginning date is determined without regard to the RMD waiver enacted under the CARES Act.
Delayed Funding of Single-Employer Defined Benefit Plans
Under the CARES Act, the due date for funding 2020 employer contributions in relation to single-employer defined benefit pension plans is delayed until January 1, 2021 but interest must accrue on such delayed payment. In addition, the CARES Act allows a plan sponsor to treat the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last year ending before January 1, 2020 as the AFTAP for plan years that include calendar year 2020 when determining whether certain benefit restrictions may apply.
CARES Act Plan Amendment Deadline
Implementation of the provisions of the CARES Act will require formal amendments to existing retirement plan documents. In this regard, the CARES Act establishes a deadline of no later than the end of the first plan year beginning on or after January 1, 2022. Thus, the earliest date that a plan would need to be amended in order to memorialize any changes imposed under the CARES Act would be December 31, 2022. In addition, a delayed amendment deadline of no later than the end of the first plan year beginning on or after January 1, 2024 applies for governmental plans.
We hope that this article helped you to better understand this topic. However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.