It has been a busy week for Congress and for employers struggling to deal with issues related to the novel coronavirus and its impact on business operations and employee benefit plans. The Senate has passed the Coronavirus Aid, Relief, and Economic Security Act (commonly referred to as the CARES Act), a bill providing a $2 trillion stimulus package in response to the coronavirus (COVID-19) pandemic and the economic crisis it has generated. The bill passed the House on Friday, March 27, 2020, and is expected to be signed by President Trump soon after.

Below is a summary of the provisions in the CARES Act addressing retirement plan issues. There are also significant provisions impacting health and welfare plans, which will be the subject of a future Client Advisory.

Availability for Withdrawals from Qualified Retirement Plans & IRAs

The Act waives the Code Section 72(t) 10% penalty tax on early withdrawals of up to $100,000 from a retirement plan or IRA for an individual:

1. Who is diagnosed with COVID-19;
2. Whose spouse or dependent is diagnosed with COVID-19;
3. Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, or closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
4. Who meets other factors as determined by the Treasury Secretary.

These withdrawals are referred to as coronavirus-related distributions, and the $100,000 limit on these coronavirus-related distributions applies to all plans offered by the employer and members of the employer’s controlled group.

Notably, the plan sponsor may rely on an employee certification that the employee is eligible for a coronavirus-related distribution, so proof of hardship is not required to be obtained from the employee. Also, note that these new coronavirus-related distributions do not change a plan’s current provisions related to “hardship withdrawals.” Federally declared disasters are now included in the list of “deemed hardships” under IRS rules, but note that, as of this printing, there are federally declared disasters only in certain states but not nationwide.

The Act permits those individuals to pay income taxes on these coronavirus-related distributions ratably over a three-year period (since the Act states that such distributions are not treated as eligible rollover distributions, the 20% mandatory federal withholding does not apply). The Act allows individuals to repay that amount tax-free back into a plan or IRA over the next three years. Those repayments are treated as rollover contributions and would not be subject to the retirement plan contribution limits.

Note that this withdrawal right applies to any qualified retirement plan (including 401(k), 401(a) and 403(b) plans), 457(b) plans, and IRAs, and withdrawals can be made from vested employer contributions and employee 401(k) contributions. While a plan sponsor is not required to offer these coronavirus-related distributions from any specific plan or from all sources, we anticipate that most plan sponsors will do so.

Plan Loans

The Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan for individuals who qualify under the guidelines listed above. Individuals with an outstanding loan from their plan with a repayment due from the date of enactment of the Act through December 31, 2020, can delay their loan repayment(s) for up to one year, without violating the loan term limit rules of the Code. However, interest must continue to accrue on those loans. Again, the plan sponsor is not required to offer the extension of current loans or loans under the increased limits, although we anticipate that most plan sponsors will want to provide this relief.

Required Minimum Distributions Not Required for 2020

The Act waives required minimum distributions for defined contribution plans (but not defined benefit plans) and IRAs for 2020 and for any 2019 required minimum distributions that have not yet been made.

ERISA Defined Benefit Plan Minimum Funding Contributions Delayed & Funding Ratio Changes

Any ERISA-required minimum contributions to a single-employer defined benefit pension plan due during 2020, including quarterly contributions, are delayed to January 1, 2021. Those amounts that are delayed will be increased for interest.

In determining whether a defined benefit pension plan is less than 80% funded and subject to, for example, benefit restrictions, a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the 2019 plan year as the AFTAP for the 2020 plan year.

Plan Amendments

Retirement plans can adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans, provided the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022, (January 1, 2024, for governmental plans) or later if prescribed by the Treasury Secretary.

Plan sponsors should reach out to plan record-keepers to determine whether the record-keepers will have any limitations or modifications for these new requirements. If a plan sponsor takes advantage of these new rules to offer coronavirus-related distributions, enhanced plan loans, or to waive required minimum distributions, the plan sponsor should keep records of when these provisions were put into place for each retirement plan. When amendments are ultimately required to address these new rules, those amendments will have to reflect which provisions the plan sponsor implemented and when.

For any questions about this client advisory, please contact a member of the Sherman & Howard Employee Benefits Group.