Retirement Plan Provisions in the CARES Act

Updated June 22, 2020 for IRS Notice 2020-50

The Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law on March 27, 2020. It is a mammoth bill of over 880 pages, and contains many employee benefit-related items. This post, the second in the CARES Act series, deals with the qualified retirement plan provisions in the Act.

New COVID-19 Penalty-Free Distribution Event in 2020

Under the CARES Act, a plan sponsor may optionally choose to allow certain eligible participants to take penalty-free distributions up to $100,000 at any time during calendar year 2020 (a “Coronavirus-related Distribution”) from their qualified defined contribution retirement plan accounts, subject to the following conditions:

  1. The plan participant is diagnosed with COVID-19 by a CDC-approved test; or
  2. The spouse or dependent of the plan participant is diagnosed with COVID-19 by a CDC-approved test; or
  3. The plan participant “experiences adverse financial consequences” as a result of being quarantined, being furloughed, or being laid off, or having work hours reduced due to COVID-19; or
  4. The plan participant is unable to work due to COVID-19 child care issues; or
  5. The plan participant has closed or reduced hours in a business owned and operated by the plan participant; or
  6. The plan participant has experienced other factors as determined by the Secretary of the Treasury; or
  7. [Updated] A participant whose pay or self-employment income is reduced due to the pandemic, or who has had a job offer rescinded or a new job’s start date delayed due to COVID;
  8. [Updated] A participant whose spouse or a member of his/her household has suffered the following financial effects due to the pandemic:
    1. Layoff, furlough, quarantine, reduced hours, or reduced pay or self-employment income; or
    2. Cannot work due to childcare unavailability; or
    3. Has had a job offer rescinded or the start date of a new job delayed; or
  9. [Updated] A business owned or operated by the participant’s spouse or a member of the participant’s household has closed or reduced hours. For this purpose, a “member of the household” is someone who shares the participant’s principal residence. Presumably, this could include a significant other, roommate, other relative, or anyone else with whom the individual is sharing a home.

The plan administrator may rely upon the participant’s certification that the qualify under one or more of these factors. [Updated] In fact, the new Notice provides a sample certification that plan administrators may use:

Name: _______________________ (and other identifying information requested by the employer for administrative purposes).

I certify that I meet at least one of the following conditions: (1) I was diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively as COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); (2) my spouse or my dependent was diagnosed with COVID-19 by  a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or (3) I have experienced adverse financial consequences because: (i) I, my spouse, or a member of my household was quarantined, furloughed or laid off, or had work hours reduced due to COVID-19; (ii) I, my spouse, or a member of my household was unable to work due to lack of childcare due to COVID-19; (iii) a business owned or operated by me, my spouse, or a member of my household closed or reduced hours due to COVID-19; or (iv) I, my spouse, or a member of my household had a reduction in pay (or self-employment income) due to COVID-19 or had a job offer rescinded or start date for a job delayed due to
COVID-19.

Signature: ______________________

In addition, except for 457 plan distributions, these COVID-19 distributions may be re-contributed to the retirement plan, or to another retirement plan within three years from the date of the distribution without regard to any contribution limits of that plan. Further, if the participant does not re-contribute the COVID-19 distribution within that time frame, taxation on the distribution (without penalty for a distribution prior to age 59-1/2) may be spread over a three-year period.

Loans from a Qualified Retirement Plan

If the plan sponsor optionally chooses (or already has in place ) where the plan document permits loans, the $50,000 loan limit for loans to “qualified individuals” (see above) made during the 180-day period from March 27, 2020 is increased to $100,000, and the cap of 50% of the present value of the vested benefit is increased to 100% of the present value of the vested benefit.

The due date for repayment of such a plan loan through December 31, 2020 can be delayed for up to one year. Later repayments for such loans are also adjusted as appropriate to reflect the prior delayed due date plus any interest accruing during the delay. The delay period is ignored in calculating the 5-year maximum loan period.

Required Minimum Distributions (RMDs)

For 2020 only, minimum distributions that would otherwise be required from defined contributions plans need not be made. This RMD waiver applies to defined contributions plans, including:

  1. Qualified 401(a) plans such as profit sharing and money purchase pension plans;
  2. 401(k) plans;
  3. 403(a) and 403(b) plans;
  4. Governmental 457(b) plans; and
  5. Individual Retirement Accounts (IRAs)

If an RMD has already been made in 2020 that would have qualified for the waiver, and it is still within the 60-day time period from the date of the RMD, that payment can be rolled back into a qualified plan or IRA to avoid taxation in 2020.

Defined Benefit Plan Funding Requirements

Single-employer defined benefit plan funding requirements for 2020, including quarterly contributions, may be deferred until January 1, 2021. At that time, they must be paid with interest for the deferral period. For purposes of determining the plan’s benefit restrictions that occur a plan year with dates during calendar year 2020, a plan sponsor may elect to apply the plan’s 2019 funding status.

Plan Amendments

At the plan sponsor’s discretion, the plan may be amended to provide these expanded COVID-19 distributions and loans, but it is not required. The plan amendment itself need not be made until the last day of the plan year beginning on or after January 1, 2022. Thus, for a calendar year plan, the amendment to the plan documents must be made by no later than December 31, 2022. Governmental plans have an additional two years; again for a calendar year plan that would be December 31, 2024.

Action Items for Plan Sponsors

If a plan sponsor wishes to take advantage of any of the relief provided under the CARES Act to allow for increased access to retirement plan funds for participants adversely impacted by COVID-19, we recommend the following action items:

  1. A careful review of your retirement plan’s procedures and plan administrator’s constraints should be conducted to determine if any
    changes are required in order to implement the applicable CARES Act provisions, including but not limited to the following:
    1. If you intend to allow for COVID-19 related distributions in 2020, a new distributive event would have to be created that is not subject to the 10% early distribution penalty tax or mandatory 20% withholding. Additionally, if you have multiple retirement plans, procedures must be put in place to make sure that the aggregate amount of COVID-19 related distributions to anyone individual do not exceed $100,000. This should not present huge difficulties for plan sponsors and investment platform recordkeepers, as these same requirements apply to qualified disaster distributions that are available to assist  participants impacted by certain natural disasters (e.g., hurricanes, floods and wildfires).

    2. If COVID-19 distributions are being repaid to your retirement plans, procedures must be in place to treat any such payments as rollover contributions and limit such repayments to the aggregate amount of distributions that the individual received from all retirement plans in your controlled group.

    3. If you intend to increase the plan loan maximum thresholds under your retirement plan(s) in 2020, procedures must be in place to allow for the increase. In addition, if your retirement plan(s) currently includes a limit on the amount of outstanding plan loans an individual may have, careful consideration should be made to determine if the limit could be increased to allow participants to take advantage of this new feature.

    4. Any delayed loan repayments should be properly documented to ensure that such loans are not treated as being in default.

    5. Loan procedures and amortization schedules will have to be updated to address the loan changes.

    6. If your retirement plan does not provide for plan loans, now is the time to consider if you want to make plan loans available to your participants.

    7. Procedures must be in place to ensure that the mandatory 20% withholding is applied to any distributions in 2020 that  include waived 2020 RMD amounts. This should not present huge difficulties for plan sponsors and recordkeepers, as these requirements are similar to rules that were adopted to waive 2009 RMD payments after the economic crisis of 2008.

  2. Participant communications should be prepared and distributed to properly inform participants of any operational changes under your retirement plan(s) as a result of the CARES Act and any additional steps that participants will have to take in order to take advantage of any such changes.

Summary

There’s lots of retirement plan changes in the CARES Act. Your Kushner & Company account manager will be proactively reviewing your plan documents over the next few weeks. In the meantime, if you have questions about adding any of these provisions, please do not hesitate to contact your account manager.

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