CARES Act Provisions Related to Retirement
April 6, 2020
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), signed into law on March 27, includes a number of provisions related to retirement that are of importance to investment advisers and their clients. For defined contribution plans and individual retirement accounts (IRAs), there is relief from required minimum distribution requirements and early distributions. There are also changes in provisions related to loans from retirement plans, and some short-term funding relief to certain defined benefit plans. Finally, additional flexibility is provided to the Secretary of Labor related to ERISA deadlines.
Temporary Waiver of Required Minimum Distributions (RMDs) (Section 2203)
The CARES Act provides a temporary waiver from RMDs for calendar year 2020. This relief is similar to that enacted by Congress in 2009 in connection with the Great Recession. The waiver applies to account holders and beneficiaries of IRAs and defined contribution plans, including 401(k), 403(b), and governmental 457(b) plans. Retirement plan sponsors have the option to provide this waiver.
The waiver applies to RMDs that were required to be made in calendar year 2020. Because of the calendar year language, this also includes RMDs that were required to be taken by April 1, 2020 for the 2019 tax year. Guidance will likely be issued by the IRS to permit individuals who already received an RMD in 2020 to rollover the distribution into an IRA or qualified plan.
Retirement Plan Distribution Relief (Section 2202(a))
The CARES Act provides relief from the 10% penalty that would otherwise apply to distributions before age 59-1/2 and the 20% mandatory withholding on eligible rollover distributions for “Coronavirus-related distributions” up to $100,000. A “Coronavirus-related distribution” is any distribution from a defined contribution plan or IRA made on or after January 1, 2020, and before December 31, 2020 to an individual:
- Who is diagnosed with COVID-19 by a test approved by the CDC;
- Whose spouse or dependent is diagnosed with COVID-19 by an approved test; or
- Who experiences adverse financial consequences as a result of:
- Being quarantined, furloughed or laid off or having work hours reduced due to COVID-19;
- Being unable to work due to a lack of child care due to COVID-19;
- Closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
- Other factors as determined by the Department of the Treasury.
Individuals may self-certify to retirement plan administrators that they are eligible for a Coronavirus-related distribution. Plan sponsors are not required to include this early withdrawal provision in their plans.
Coronavirus-related distributions may be repaid to the original plan (if permitted) or rolled over to another eligible plan in one or more contributions at any time during a three year period beginning on the day after the date on which the distribution was received. The repayment will be treated as a non-taxable transfer if the amount of the distribution is repaid within the next three years. If a distribution is not repaid, it will be taxed as income ratably over three years.
Increase in Retirement Plan Loans and Suspension of Loan Repayments (Section 2202(b))
In addition to providing relief related to retirement plan distributions, the CARES Act increases the cap on loans by plan participants, and temporarily suspends loan repayments. Similar to the provision related to distributions, this provision applies to individuals who are eligible to receive Coronavirus-related distributions. Advisers should note, however, that plans are not required to permit loans.
For the 180 day period after enactment of the Act, the $50,000 or 50% of the vested account balance cap on participant loans is increased to $100,000 or 100% of the vested account balance. Also, if a loan repayment is due between March 27, 2020 and December 31, 2020, the repayment is delayed for up to one year from the original due date. Subsequent loan repayments must be adjusted to reflect the delay in the 2020 repayment and any interest accruing during that delay. The five-year limit on loan repayments disregards the one-year delay for 2020.
Plan Amendments: For all three of the provisions discussed above, amendments to retirement plans must be adopted on or before the last day of the plan year beginning on or after January 1, 2022. For government plans, the date is January 1, 2024.
Single-Employer Plan Funding Rules (Section 3608)
For single-employer defined benefit plans, the CARES Act permits employers to delay minimum required contributions that are due during 2020 until January 1, 2021. However, interest will accrue from the original due date for the contribution through the payment date. In addition, these plans may use the 2019 adjusted funding target attainment percentage (AFTAP) as the AFTAP for any plan year that includes 2020.
Extension for Actions Required or Permitted to be Completed Under ERISA (Section 3607)
Finally, the CARES Act amended ERISA to allow the Secretary of Labor to provide an extension of up to one year for actions required or permitted to be completed under ERISA.
The IAA will update members on guidance or extensions issued by the Department of Labor or the IRS in this area.
TAGS: Coronavirus, Retirement Plans, CARES Act