• by PCS
  • 04/02/2020
  • PCSRetirement, Compliance

Compliance Alert: CARES ACT is Official!

In response to the COVID-19 pandemic and resulting economic disruption, on Friday Congress passed and the President signed the massive $2.2 trillion stimulus bill known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The total cost of the stimulus is about 9% of our GDP. Now that the CARES Act is official, we wanted to provide more information regarding CARES Act relief for eligible retirement plans (including 401(k), 403(b), governmental 457(b) and Individual Retirement Arrangements (IRAs)), including expanded and penalty-free withdrawal rights, expanded loan rights, extended rights to pay back loans and withdrawals, and waiver of mandatory distributions.

Expanded and Penalty-Free Withdrawal Rights
The CARES Act offers expanded and penalty-free withdrawals. Plans may (but are not required) to permit these.

  • Coronavirus-Related Distributions. Generally, there is a 10% “penalty” tax on distributions from retirement accounts before age 59.5. This 10% early distribution penalty will not apply to "coronavirus-related distributions" up to $100,000 per person from the person's retirement plan accounts. In addition, the amount distributed may be re-contributed to a retirement plan within three years of the date the distribution is received (regardless of any plan limit on contributions). If the individual does not re-contribute the distribution within that three year timeframe, the taxes on that coronavirus-related distribution may be spread over a 3-year period. Federal income tax withholding is not required on coronavirus-related distributions, and a direct rollover need not be offered.
    • Under the CARES Act, generally “coronavirus-related distribution” means any distribution from an eligible retirement plan made from the date this bill was enacted until December 31, 2020, to an individual “(I) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, (II) whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or (III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).”
    • Plan Administrators may rely on an individual's written certification that the individual qualifies for a coronavirus-related distribution under these categories.
  • Waiver of Required Minimum Distributions (RMDs). Defined contribution retirement plans, as well as IRAs, may suspend RMDs required to be paid in 2020 because of a required beginning date in 2020 if the payout was not made before January 1, 2020. Minimum distributions otherwise required in 2020 from defined contribution plans need not be made.

Expanded Participant Loan Rights

The CARES Act expands participant loan options as well. Generally, employer-sponsored retirement plans may offer participant loans under the plan. If a plan permitted participant loans, prior to the CARES Act those participant loans were subject to a limit of $50,000 or 50% of the participant’s vested benefit (subject to lookback and other rules). Now, under the CARES Act, the participant loan limit under employer-sponsored retirement plans has increased to $100,000 or 100% of the participant’s vested benefit for loans to a “qualified individual” (which is the same as the definition above for coronavirus-related distributions). Those expanded limits apply for a loan made in the 180 days from March 27 to September 23, 2020. Plans are not required to allow participant loans or allow for participant loans under the higher limits authorized under the CARES Act.

In addition to the availability of higher participant loan amounts, the CARES Act allows a delay in the repayments by a "qualified individual" for up to one year for participant loans from the date of enactment through December 31, 2020. That delay may extend the general 5-year participant loan repayment period. If a plan allows a repayment delay, later repayments should be adjusted for interest accrued during the delay and to for the extended repayment period.

Plans may (but are not required to) offer the relief described above and need not amend the retirement plan in advance. To the extent a plan wants to allow participants to take advantage of this relief, please be aware that plan amendments for the coronavirus-related distribution and loan limits described above need not be made until at least the last day of the first plan year beginning on or after January 1, 2022. Governmental plans have two years after that date.

Please do not hesitate to contact us with any questions about the CARES Act provisions impacting retirement plans.