Primary Impacts of the Coronavirus Aid, Relief and Economic Security Act on Employee Benefit Plans
On March 27, 2020 Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which is intended to provide significant relief and support to businesses in numerous areas. As outlined below, the legislation provides immediate tools to increase flexibility for retirement plan sponsors and participants though plan administrative action, with an extended subsequent period to update their plan documents accordingly.
1. 401(k) plan emergency withdrawals
Plans may permit individuals financially impacted by COVID-19 to withdraw up to $100,000 in emergency funds from their plan retirement accounts or IRAs through December 31. An individual is considered to be financially impacted by COVID-19 if:
the individual is diagnosed with COVID-19;
their spouse, or dependent is diagnosed with COVID-19; or
the individual experiences adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced due to COVID-19, or is unable to work due to lack of child care due to COVID-19, or a business owned or operated by the individual closes or reduces hours due to COVID-19.
Plan administrators may rely on an employee’s certification that the employee meets one or more of these conditions in determining whether a distribution is permitted. Any funds withdrawn may be repaid into the same retirement accounts for up to three years in one or more contributions. The participant may also repay the amount into a different retirement account and treat the amount as an eligible rollover distribution. If the individual does not repay the amount to an eligible retirement plan, the distribution will be included in taxable income over a period of three years.
Individuals who take such a withdrawal before age 59½ will be exempt from paying the usual 10 percent penalty on early withdrawals from retirement accounts.
2. 401(k) plan emergency loans
Plans may permit individuals financially impacted by COVID-19 (using the same definition as for 401(k) plan emergency withdrawals) to take loans of up to $100,000 from their retirement accounts (instead of the usual limit of $50,000). Loan repayments, which can be spread out over five years, may be delayed up to one year.
3. Required minimum distributions
Required minimum distribution requirements will not apply for calendar year 2020.
4.Qualified plan amendments
Plans may operate to permit emergency withdrawals, emergency loans and waive required minimum distributions, as described in paragraphs (1) through (3) without a formal amendment, so long as the plan is amended by the end of the 2022 plan year.
5. Pension payments
Employers maintaining single-employer pension plans can delay making minimum required contributions due this year until January 2021. Contributions would be due with interest, accrued at a plan’s effective rate.
6. Extension of Cooperative and Small Employer Charity Pension Plan status
The Cooperative and Small Employer Charity Pension Flexibility Act of 2014 provides more favorable funding rules for certain defined benefit pension plans of charities, schools and volunteer organizations, referred to as cooperative and small employer charity (CSEC) plans. CSEC plan status is now extended to charitable employers whose primary tax-exempt purpose is conducting medical research (either directly, or indirectly through grant-making) or providing services to mothers and children.