The CARES Act Effect on Retirement Plans
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The Act largely stabilizes fragile industries, provides loans and tax credits to businesses tied to their retaining their workforces during these uncertain times, and offers additional unemployment relief to employees hurt by COVID-19. But the CARES Act does more. It significantly loosens the restrictions on loans and distributions from retirement plans, along with providing funding relief for defined benefit plans, giving employers important options to consider in these times of need.
These provisions are optional. Employers are not required to implement these new features. However, some aspects of the rules already may be captured in employer plans through the plans’ rollover contribution rules. Further, plan recordkeepers have started proactively implementing these changes programmatically, providing employers only with brief “opt out” periods. Thus, although retirement plans are not top of mind these days, employers should not deprioritize the review of plan-related communications from plan recordkeepers during this time, as they may contain important CARES Act details.
An overview of the key changes follows:
COVID-19 Related Distributions (CRD) – Sec. 2202(a) allows participants to have greater access to their retirement funds. Qualified participants are no longer subject to the 10% excise tax applicable to early withdrawal if the withdrawal is a CRD of no more than $100,000. The Act defines a CRD as:
Distributions made from an eligible retirement plan
Tax-qualified retirement plans
Tax-deferred annuities 403(b) plans
Section 457(b) governmental sponsored deferred compensation plans
To a “qualified participant”:
Diagnosed with COVID-19
Spouse or dependent diagnosed with COVID-19 or
Furloughed, laid off, reduced hours or unable to work because of COVID-19
Plan Administrators may rely on the participant’s certification as satisfaction of the criteria for eligibility. At the participant’s election, the CRD distribution either will: (A) not be taxable to the participant, subject to the participant repaying the amount to an eligible retirement plan any time within the immediately following 3- year period in one or more payments; or (B) taxed ratably over a 3-year period. Either way, these distributions will not be subject to mandatory 20% tax withholding but will be subject to 10% withholding unless voluntarily waived by the participant.
The devil is in the details here. Additional guidance is needed to determine exactly how this option is to be effectuated, administered, and reported. Further, employers will need to balance employees’ need for resources against the impact of depleting retirement savings in a down market, among other considerations.
Plan Loans – Sec. 2202(b) provides qualified participants with more plan loan flexibility. The CARES Act doubles the amount available for plan loans taken during the 180-day period beginning on March 27, 2020, to the lesser of $100,000 or 100% of their vested account balance. Qualified Participants must meet the same criteria for a loan as required for an early distribution above.
Sec. 2202(b) also provides qualified participants with loans in effect on or after the CARES Act enactment date of March 27, 2020, that would otherwise be due between March 27, 2020, and December 31, 2020 to suspend their loan repayment obligations for one year, akin to the rules involving suspensions for military leaves or unpaid leaves of absence. The interest continues to accrue during the suspension period and the statutorily allowed maximum of 5 years for repayment does not include the year of suspension.
The CARES Act provisions affecting plan loans modify provisions in Section 72(p) of the Internal Revenue Code. If the loan does not meet the requirements of Section 72(p) and the implementing regulations, it is treated as a distribution and thus taxable. But a plan could always impose more rigorous requirements.
Thus, even though the CARES Act modifies these plan loan rules, employers, committees, or administrators can decide whether or not to implement them. When making this decision, consideration should be given to factors such as a participants’ ability to repay loans of this size and whether payroll and recordkeeping systems are in place to administer suspended loan repayments.
Required Minimum Distributions (RMD) – Sec. 2203 allows plans to waive RMDs otherwise due for 2020 for those participants reaching age 72 during 2020. This change is akin to the RMD suspension rules that date back to 2009.
Important Note About Plan Amendments: Employers desiring to implement any of the CARES Act changes discussed above will need to amend their retirement plans, as needed, to incorporate these provisions with operational compliance in the interim. The deadline for these plan amendments will not be earlier than the last day of the first plan year beginning on or after January 1, 2022 (i.e., December 31, 2022, for calendar year plans).
DOL authority to determine filing deadlines – Sec. 3607 extends the DOL’s authority to defer for up to 1 year any deadline date set by ERISA (which may include notices, filings, etc.) for reasons because of public health emergencies such as the COVID-19 pandemic.
Defined Benefit Plans’ Funding Rules for Single Employers – Sec. 3608 relaxes the minimum funding rules by extending the due date for all contributions (including quarterly contributions) originally due in 2020, until January 1, 2021. The extended payment is adjusted for any interest accrued. Plans also may use the adjusted funding target attainment percentage (AFTAP) from the last plan year ending before January 1, 2020, in applying the Internal Revenue Code Section 436 benefit restrictions.
Education Assistance – Sec. 2206 allows an employer to include payments to of an employee’s qualified education loan, principal, and interest, as part of education assistance under Internal Revenue Code Section 127. The total allowed annual amount of $5,250 does not change.
Executive Compensation – Sec. 4004 addresses parameters to which companies must comply to receive certain emergency direct lending relief through the CARES Act.