CARES Act Offers Significant Relief for Retirement Plan Participants and Sponsors
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which President Trump signed on March 27, 2020, contains several significant relief provisions affecting qualified retirement plan participants and plan sponsors.
Qualified retirement plans can allow “qualified individuals” to take an in-service withdrawal up to $100,000 between January 1, 2020, and December 31, 2020. The withdrawal will be subject to income tax (pro rata over a 3-year period), but will not be subject to the 10 percent early distribution penalty that ordinarily applies for individuals under age 59-and-one-half. In addition, the withdrawal can be repaid to a qualified plan or to an individual retirement account within the 3-year period beginning on the date of distribution and be treated like a rollover.
This change is not mandatory. In lieu of the full $100,000 amount, a plan sponsor could choose not to add this in-service distribution option or to implement a withdrawal limit less than $100,000.
“Qualified individual” means an individual (i) who is diagnosed with COVID-19 by a test approved by the U.S. Centers for Disease Control and Prevention (CDC); (ii) whose spouse or dependent is diagnosed with COVID-19 by a CDC-approved test; or (iii) who experiences adverse financial consequences as a result of specified COVID-19-related incidents.
Relaxed Plan Loan Requirements
The CARES Act includes two provisions that relax the rules for participant loans from qualified retirement plans. First, the maximum amount available for a plan loan made to a qualified individual (as defined above) between March 27, 2020, and September 23, 2020, (180 days following enactment), can be increased from the lesser of $50,000 or 50 percent of his or her vested balance to the lesser of $100,000 or 100 percent of his or her vested balance under the plan. Similar to the above penalty-free withdrawal, this change is not mandatory. A plan sponsor could choose not to change the current loan limits or to implement an increase that is between the current loan limits and the maximum allowable increase given above.
Second, the CARES Act provides for a delay in plan loan repayments. If a qualified individual has a loan repayment due during the period from March 27, 2020, through December 31, 2020, the repayment due date is extended for up to 1 year, with the term of the loan (and the 5-year maximum repayment period) also extended. Subsequent repayments must be adjusted to reflect any interest accrued during the repayment delay. Presumably, a participant can choose to continue repayments without delay, but the plan sponsor will need to confirm that the plan’s recordkeeper can administer this option.
Waiver of Required Minimum Distributions
Required minimum distribution (RMD) requirements for defined contribution retirement plans are waived for 2020. This waiver affects participants who reached age 70-and-one-half prior to December 31, 2019, and who are no longer employed by the plan sponsor. Participants can still choose to take a distribution, but they are not required to do so under the Internal Revenue Code. If a participant chooses to take a distribution, he or she may treat such distribution for 2020 as an eligible rollover distribution that is not taxable. The RMD waiver is discretionary. Plan sponsors should consider whether to adopt the RMD waiver and confirm that the plan’s recordkeeper can administer the plan in accordance with that decision.
Defined Benefit Plan Funding Relief
Any minimum required contribution to a single-employer defined benefit retirement plan that is due in 2020 can be delayed until January 1, 2021. Accrued interest will be due for the period from the original due date to the actual payment date. In addition, a plan sponsor can elect to use the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020, as the AFTAP for plan years that include the 2020 calendar year when they are determining whether funding-based restrictions on plan amendments, lump-sum distributions, and certain other accelerated distributions will apply for those plan years.
Potential Impact on Eligibility for Federal Bailout Funds
Notably, the CARES Act also provides for a federal bailout program for employers with 500 to 10,000 employees. While this program is not directly tied to qualified retirement plans, employers considering the program should exercise caution if also considering changes to their current retirement plans, such as reducing or suspending 401(k) matching or nonelective contributions. One requirement for the bailout program is that the funds be used to retain at least 90 percent of the recipient’s workforce, at full compensation and benefits, until September 30, 2020. There is no guidance yet about whether any plan changes can be made without making the employer ineligible for the bailout.
Plan Amendments and Action Steps
Fortunately, the CARES Act provides a grace period for a plan sponsor to amend the plan to reflect the changes for the penalty-free withdrawal, plan loans, and the required minimum distributions. The deadline for non-governmental plans is the last day of the plan year beginning on or after January 1, 2022, which will be December 31, 2022, for calendar year plans. For governmental plans, the deadline is the last day of the plan year beginning on or after January 1, 2024, which will be December 31, 2024, for calendar year plans.
While the amendment deadline seems far away, plan sponsors will need to act in an expedited manner to consider coordinating these changes (which are already effective) with their service providers to implement the changes, effectively communicate these changes to participants, and update their Summary Plan Descriptions or issue a Summary of Material Modifications. In addition, plan sponsors will need to plan for and implement the funding relief for their defined benefit plans.