Summary of the Impact of the CARES Act on Retirement Plans
In an effort to help individuals weather the economic downturn created by the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security (CARES) Act adds a new distribution option, increases the maximum loan amount and provides for the suspension of certain loan repayments and required minimum distributions for eligible retirement plans. Below is a summary of the key provisions.
Eligible retirement plans may offer distributions of up to $100,000 to “qualified individuals.” These distributions are exempt from the normal 10 percent excise tax that applies to in-service distributions made to participants under age 59.5. In addition, the distribution is not subject to the 20 percent mandatory withholding that applies to eligible rollover distributions. This means, absent a participant’s election to have taxes withheld, the participant will receive the entire amount of the distribution.
The $100,000 limit applies to each individual for the 2020 tax year. However, the employer is not responsible for monitoring this limit except for the retirement plans it (or a member of its controlled group) maintains.
Participants may repay a portion or all of the distribution in one or more payments over a three-year period (beginning on the date following receipt of the distribution) to an IRA or any eligible retirement plan of which they are a beneficiary. If repaid, the distribution is not taxable, although at this time there is no guidance on how this will be implemented.
Coronavirus-related distributions must be made before Dec. 31, 2021.
To be eligible for the distribution, a participant must be a “qualified individual.” A qualified individual is an individual that satisfies one of the following:
- A participant has been diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDCP).
- A participant’s spouse or dependent has been diagnosed with COVID-19 by a test approved by CDCP.
- Due to COVID-19, a participant has experienced adverse financial consequences due to being quarantined, furloughed or laid off, unable to work due to lack of child care as a result of COVID-19, or having their hours reduced, or the closing or reduction of hours of a business owned or operated by the individual.
- Other factors, as determined by the Secretary of the Treasury in future guidance.
Employers are not required to ascertain whether a participant satisfies one of the conditions set forth above. Instead, the employer can rely on the employee’s self-certification.
Unless a participant elects otherwise (the mechanics of which have yet to be determined), the amount of the distribution will be included in a participant’s income ratably over the three-taxable-year period beginning with the tax year of the distribution.
Loans from Qualified Plans
Increase in the Maximum Loan Amount
Plans may temporarily increase the amount available for participant loans, for a qualified individual (see definition under Coronavirus-Related Distributions), to the lesser of: (1) $100,000 or (2) a participant’s entire vested account balance. This increased amount is available only with respect to loans made until Sept. 23, 2020 (180 days after enactment).
Suspension of Loan Repayments
For a qualified individual (see definition under Coronavirus-Related Distributions) with an outstanding loan on or after March 27, 2020, repayments through Dec. 31, 2020, may be delayed for one year. The delay period will extend the five-year maximum loan period and the term of the loan. Interest will continue to accrue during the delay period. Once repayments resume, they will need to be adjusted to reflect the delay and accrued interest.
Required Minimum Distributions
Required minimum distributions (RMDs) are waived for certain retirement plans (defined contribution 401(a), 403(b), 457(b) plans and IRAs) for calendar year 2020. The waiver applies to 2019 RMDs that were required to be made by April 1, 2020 (if they were not made in 2019), and to 2020 RMDs that are required to be made by April 1, 2021. If an RMD has already occurred, a participant may be able to roll over the distributed amount into an IRA or back into the retirement plan from which it was paid.
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