COVID-19 Client Alerts:
Retirement Plan Provisions of CARES Act
The CARES Act permits eligible retirement plans to allow Coronavirus-Related Distributions (CRDs) of up to $100,000 from the date of enactment to the end of 2020 to an eligible individual. An eligible individual is one: who is diagnosed with the SARS-CoV-2 virus or coronavirus disease 2019 (COVID-19) because of testing positive for the virus or disease; whose spouse or dependent is so diagnosed; or who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors determined by the Secretary of the Treasury. The Plan Administrator can rely on an employee’s certification that the employee satisfies the requirements to be an eligible individual.
CRD withdrawals are not subject to the 10% penalty for early withdrawal or 20% federal income tax withholding. Moreover, while subject to income tax, the taxes are spread over 3 years unless the participant elects to pay sooner. Most importantly, the withdrawals can be re-paid to the plan over 3 years from the date of distribution. Repayments can even be made to another employer’s plan that permits rollovers should the employee change jobs.
An eligible retirement plan is defined as any qualified retirement plan maintained by the employer (which includes pension plans), section 403(a) and 403(b) plans, and section 457(b) plans of governmental employers and IRAs.
Enhanced Loan Provisions
The CARES Act allows eligible plans to make participant loans to any eligible individual (as defined for CRDs above) in a maximum amount of the lesser of $100,000 or the present value of the participant’s vested benefit under the plan. This is double the maximum for normal participant loans. An eligible plan for these loans is any qualified plan, a 403(a) or 403(b) plan, but not 457 plans.
In addition, for any participant loan of an eligible individual that is outstanding as of the date of enactment of the Act (March 27, 2020), the loan repayments to be made through December 31, 2020 are delayed for one year. The subsequent remaining loan repayments are re-amortized to account for the delay and interest earned during the delay.
Plans have to be amended to permit such CRDs or loans. However, the CARES Act permits employers to implement the CRDs and loans in operation and wait to amend the plan until the last day of the first plan year beginning on or after January 1, 2022, or a later date if prescribed by the Secretary of the Treasury.
The CARES Act temporarily waives minimum distribution requirements for defined contribution plans and IRAs for calendar year 2020 (including distributions required to be made by April 1).
Defined Benefit Plans
The CARES Act allows more time for single-employer defined benefit pension plans to make their minimum funding contributions. Any required contributions that are due in 2020 can be delayed until January 1, 2021. Interest will accrue on the delayed contributions from the original due date.
The Act also allows plans to avoid restrictions imposed on significantly underfunded plans by permitting defined benefit plans to use their funding status for the plan year ending prior to January 1, 2020 to determine their funding status.
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