The CARES Act and Retirement Plans

Posted on Apr 1, 2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, in response to the coronavirus pandemic. Key provisions that pertain to retirement plans include the following:

Required Minimum Distributions (RMDs): Required minimum distributions have been suspended for the entire 2020 calendar year. This applies to 401(a) plans, 401(k) plans, 403(b) plans, IRAs, and governmental 457(b) plans.  The RMD waiver also applies to people who attained age 70½ in 2019, and have a required beginning date of April 1, 2020. If that individual did not receive their RMD in 2019, then the waiver applies.  The RMD suspension also includes RMDs due as a death benefit in accordance with the five or ten year rules, and those time limits are extended by one year. If a participant has already received an RMD distribution in 2020, they may roll it over and defer paying taxes.

Coronavirus-related Distributions (CRDs): The bill permits any “eligible retirement plan” (such as qualified plans, IRAs, 401(a), 401(k), 403(b) plans, and governmental 457(b) plans) to make a coronavirus-related distribution, or CRD, from the date of enactment (March 27, 2020) through December 31, 2020.

 “Qualified” individuals may withdraw up to $100,000 in corona-virus related distributions without incurring the 10% premature distribution tax. Qualified individuals are people who self-certify that they have been diagnosed with the virus or whose spouse or dependent has been diagnosed with the virus, and have suffered financial losses as a result of the pandemic -- such as job loss, furlough, reduction in hours, inability to work due to unavailability of child care, quarantine, or have had their business closed or hours reduced because of the pandemic.

The distribution is still subject to ordinary income tax, which can be spread out over a period of three years. The participant is allowed to repay all or part of the distribution to the plan or to any plan that can accept rollovers. The distributions are not considered eligible rollover distributions, and are not subject to the usual 20% mandatory withholding. There is no requirement to provide a 402(f) notice or offer a direct trustee-to-trustee transfer.

Qualified Loans: Qualified individuals (those eligible to receive a CRD) are permitted loans of up to 100% of their vested account or benefit, up to $100,000, for loans taken for a period of 180 days after date of enactment (e.g. loans made on or before September 23, 2020). Plan sponsors must enforce the limit for all plans in the same controlled group. However, not all retirement plans offer regular hardship withdrawals or loans. If plan sponsors decide to offer these loan or CRD provisions, they will need to adopt plan amendments by the end of the 2022 plan year, with an additional two years allowed for governmental plans.

Loan payments due on any outstanding loan between the date of enactment and December 31, 2020, are delayed for up to one year, and the five-year repayment period is extended for one year, although interest continues to accrue on the loan during this period of delay.

Plan sponsors will need to work closely with their recordkeepers and payroll providers on the administrative issues involved with these new provisions, especially with regard to loans. For plan sponsors that currently offer loans or plan to offer CRD loans, both types of loans must be tracked on an individual basis to ensure compliance with CRD-eligible loan rules and non-CRD loan rules.

Other Important Components of the CARES Act: 

• The Department of Labor has been granted authority to waive ERISA-imposed deadlines for up to one year, which could impact salary deferral contribution deadlines, participant notices, and other requirements.
• With regard to student loan reimbursement, employers can reimburse a “qualified education loan,” although this provision expires on December 31, 2020.
• With respect to HSAs, all telehealth and other remote care services can be covered pre-deductible without violating federal rules for high deductible health plans paired with an HSA – for plan years that begin on or before 12/31/21. The CARES Act also eliminates the rule that limits the use of HSAs to prescribed medicines or drug expenses incurred after December 31, 2019.
• For defined benefit and money purchase pension plans, the law includes a delay in contribution deadlines for calendar year 2020, up to January 1, 2021, although the employer must pay interest on delayed contributions.

This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.