What a plan sponsor needs to know NOW!
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) became law on March 27, 2020 to address many issues in our country caused by the coronavirus. This article addresses issues that employers who sponsor retirement plans must address quickly.
New Distribution Event sans Penalty
Plan sponsors may elect to allow coronavirus-related distributions (CRD) from their qualified retirement plan. A CRD may be made only to a qualifying individual. A qualifying individual is (a) one who is diagnosed with coronavirus, (b) a spouse or dependent diagnosed with coronavirus or (c) one who experiences adverse financial consequences due to reduction of hours, being furloughed or laid off, being quarantined or unable to work due to lack of child care or has to close or reduce hours in his/her business (plus other factors determined by the Treasury Department).
A CRD may be made from most qualified defined contribution retirement plans (401(k), 403(b), governmental 457(b) and IRAs). The CRD is a new distribution option available to qualifying individuals even if they have not otherwise had a distributable event (and even if they are under age 59 ½). A plan sponsor may rely on the employee’s self certification that s/he is a qualifying individual. The maximum amount of a CRD is $100,000 and must occur in 2020 in order to be considered a CRD.
What is so special about the CRD? First, it allows distributions that would otherwise not be allowed under the terms of the plan or under the tax code. Second, distributions from a qualified plan to someone under age 59 ½ is subject not only to taxation but also to a 10% excise penalty (to deter people from taking money out of a retirement plan early). While these CRDs will still be taxed, the tax may be spread over three years and the 10% penalty is waived. The CRD is subject to a mandatory 10% tax withholding and the plan sponsor must provide notice to the qualifying individual that this tax withholding may be waived. There are significant penalties for failing to provide this notice so plan sponsors will want to work closely with their plan providers to ensure compliance with the new law and notification requirements are met. One other interesting aspect of a CRD is that it may be repaid to the plan (or IRA) over the next three years and the funds can then regain tax deferred status.
New participant loan maximums
Prior to the CARES Act, if a qualified retirement plan allowed participant loans, those loans were limited to the lesser of $50,000 or 50% of the participant’s vested account balance and generally had to be repaid over a five year period (exceptions for purchase of residence). The CARES Act temporarily increases the maximum loan amount to the lesser of $100,000 or 100% of the participant’s vested account balance. This applies ONLY to participant loans made within the 180 days following the enactment of the CARES Act on March 27, 2020 and is only available to qualifying individuals as defined above. If your plan does NOT allow participant loans, you do NOT have to add that to your plan.
One other interesting provision of the CARES Act relates to the repayment of a participant loan. As noted above, a participant loan must generally be repaid within five years. However, under the CARES Act, loan repayments may be extended for loans outstanding on or after March 27, 2020 if the due date for any loan payment occurs between March 27, 2020 and December 31, 2020. Effectively, this gives participants an extra year to repay the loans and the extension will not count against the five year period.
Waiver of Required Minimum Distributions for 2020
Qualified plans must generally begin making required minimum distributions to certain plan participants upon the attainment of age 70 ½ (now 72). The CARES Act allows those to be waived for 2020.
If the plan sponsor makes any of the CARES Act changes noted above, the plan document will need to be updated in 2022 for most plans (2024 for governmental plans). However, these changes will need to be communicated to plan participants so plan sponsors should work with their plan vendors to implement these changes and to communicate these changes to plan participants. The devil is in the details – plan systems and plan policies/procedures will likely need to be revised to accommodate these plan changes.
Defined benefit plans may delay contributions
Employers who sponsor a defined benefit plan must make certain contributions to the plan each year. For 2020, the CARES Act allows the employer to defer any 2020 payments to 2021 (with interest).
Department of Labor (DOL) given authority to extend deadlines
While the DOL has not yet extended plan-related deadlines, it is anticipated that it will extend certain plan deadlines.
Stay tuned for more updates as the DOL and IRS provide more guidance.