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.

Coronavirus Distributions

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.

The fanfare and excitement over the recent enactment of the Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES”) Act may have caused some plan sponsors to miss another very important piece of tax-qualified retirement plan related relief.  IRS Notice 2020-18 (“Notice 20-18”) was released on March 20, 2020 and, on March 24, 2020, the IRS issued certain “frequently asked questions” (“FAQs”) about Notice 20-18.

Notice 20-18 indicated that all federal income tax returns and tax payments that would have otherwise become due on April 15, 2020 are automatically postponed until July 15, 2020.  The delay of this specific deadline is significant to the tax-qualified retirement plan industry.  This is because, as you probably already know, the deadline for making certain contributions to a tax-qualified retirement plan under section 404(a)(6) of the Internal Revenue Code in connection with a particular tax year generally is the deadline for the plan sponsor to file its tax return for that time period.  Thus, the guidance offered under Notice 20-18 inspired questions as to whether the postponed tax filing deadline also impacted the plan contribution deadline.

Although not directly addressed within Notice 2018, the FAQs specifically stated that:

Q: For employers with a federal income tax return due date of April 15, 2020, is the end of the grace period under section 404(a)(6) to make contributions to their qualified retirement plans              on account of 2019 also July 15, 2020 as a result of this relief?

A: Yes, because … [Taxpayers] … for whom the due date for filing Federal income tax returns and making Federal income tax payments that would be due April 15, 2020, is now July 15,                      2020, the end of the grace period for those employers is also July 15, 2020 under this relief.  So, for example, if an employer is a corporation with an April 15, 2020 due date for filing the                    Form 1120, then the grace period under section 404(a)(6) for the employer to make contributions to its workplace-based retirement plan that are treated as made on account of 2019 ends on            July 15, 2020.

Thus, Notice 2020-18 and the FAQs authorize a plan sponsor for whom the 2019 retirement plan contribution deadline was April 15, 2020 to postpone the contribution deadline until July 15, 2020.  However, please be aware that, in application, this relief is available only with regard to certain forms of employer contributions since employee deferrals are subject to a different contribution timeframe.

Finally, the relief considered above is different than the defined benefit pension plan funding relief granted under the CARES Act.  For a discussion of that and other relevant provisions of the CARES Act, please refer to our separate Legislative Update being released concurrently with this article which specifically addresses retirement plan provisions of the CARES Act.

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.

Many employers are unaware that, in certain circumstances, they may be eligible for a valuable tax credit in connection with their establishment of a retirement plan.   Although this particular tax credit has been available for almost two decades, it is still surprising to see the general lack of awareness that most plan sponsors have regarding this tax saving opportunity.  As a result, this article is intended to familiarize readers with this tax credit so that they can attempt to evaluate its application to their (or their client’s) tax situation.

Effective for tax years beginning on or after January 1, 2002, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)[1] created a tax credit for “small employers” who establish a new “eligible employer plan”.  The credit is equal to up to 50 percent of the “qualified plan start-up costs” incurred for a period of up to three years.  In addition, a $500 maximum limit applies in relation to the credit for each of the three years that the credit may be claimed.

Recently, the Setting Up Every Community for Retirement Enhancement (“SECURE”) Act increased the original limits discussed above for tax years beginning after December 31, 2019. The revised value of the credit is now equal to up to 50 percent of qualified plan start-up cost for each of the first three years of the plan’s existence up to the greater of: 1) $500; or 2) the lesser of a) $250 per eligible non highly compensated employee; or b) $5,000. As a result of this change, the potential tax credit has substantially increased from a potential maximum of $500 per tax year to a potential maximum credit of $5,000 per year.

An employer may elect to initially apply the credit to the year the permissible plan is established or to the year before establishment.  Also, the employer may not deduct any start-up costs if it claims the credit.

As you can see, there are several very important “defined terms” included within the authorizing language for the credit that are critical to determining its availability to any particular plan sponsor.  First of all, only a “small employer” is eligible to claim this tax credit.  In this context, a small employer is defined in the same manner as it is used in conjunction with SIMPLE plans.  Thus, in general, a small employer for purposes of this tax credit is an employer with 100 or fewer employees who received at least $5,000 of compensation from such employer for the preceding year.

Another important consideration is that the start-up credit is only available with respect to the establishment of an “eligible employer plan”.  In general, an eligible employer plan is a tax-qualified plan under section 401(a) of the Code (such as a profit sharing plan, 401(k) plan and/or defined benefit plan, among others), Simplified Employee Pension Plan (“SEP”) or Savings Incentive Match Plan for Employees (“SIMPLE”).  In addition, in order to qualify for the credit, the newly established plan must have at least one participating non-highly compensated employee.  This final “eligible plan” qualification is of great importance because it effectively eliminates the credit with regard to “solo(k)” plans.

Finally, the credit may only be applied in connection with “qualified plan start-up costs”.  For this purpose, qualified plan start-up costs are any ordinary or necessary expenses incurred with regard to the establishment of such plan, its administration or certain costs incurred related to employee investment education expenses.

Although beyond the scope of this article, it is noteworthy that the SECURE Act also established a tax credit for plans that implement an “eligible automatic enrollment arrangement” (“EACA”) of $500 for each of the first 3 years that the plan has such an auto enrollment feature.  This “auto enroll” tax credit is separate and distinct from the start-up tax credit that is the subject of this article and both the start-up and auto enroll credits can be claimed concurrently.  Also noteworthy is that the EACA need not be in place at the time the plan is established in order to qualify for the credit.  As with the previously discussed small plan establishment tax credit, this credit is effective for tax years beginning after December 31,2019

Obviously, everyone’s tax situation is different so, as much as we hope this article helped you to better understand this topic, it is not to be construed as financial, tax or legal advice.  Therefore, if you believe that it may apply to your (or your client’s) company, be sure to further discuss it with a qualified accountant or tax professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

[1] Although the authorization for this tax credit under EGTRRA was scheduled to expire at the end of 2010, it was instead extended and made permanent by the Pension Protection Act of 2006 (“PPA”).