The CARES Act impact on retirement plans for plan sponsors
The CARES Act gave retirement plan participants expanded access to their retirement funds, including a penalty-free, Coronavirus-related distribution up to $100,000 and expanded loan options. Here’s what plan sponsors and administrators need to know to participate in the programs.
- Allowance for a “Coronavirus-related distribution” of up to $100,000 that is exempt from the 10% early withdrawal penalty,
- An increase in the participant loan limit to the lesser of $100,000 or the participant’s entire vested balance,
- A 1-year extension on the due date of any participant loan currently due between March 27, 2020 and December 31, 2020, and
- A waiver of required minimum distributions (RMDs) scheduled in 2020.
While each of these provisions offers some level of flexibility for plan participants, they also come with some caveats for the plan sponsors and administrators who, in some cases, may be required to make changes to the plan document or plan operations.
In addition, it's important to note that some provisions are dependent upon the plan sponsor adopting them.
The first three items are only available to plan participants who have been affected by COVID-19. To qualify, a plan participant must either:
- Be diagnosed with COVID-19,
- Have a spouse or dependent diagnosed with COVID-19, or
- Experience adverse financial consequences due to furlough, layoff, quarantine, reduced work hours, or lack of child care.
It’s important to note that the third qualification, adverse financial consequences, only applies to the participant in question. If a participant’s household suffers adverse financial consequences due to the furlough or layoff of a spouse, that alone would not qualify the participant for the penalty-free withdrawal, increased loan limit, or loan extension. Of course, the participant’s spouse may be eligible for favorable treatment under his or her employer’s retirement plan. It is up to the participant to self-certify that the criteria are met; plan sponsors and administrators are not required to verify participant’s representations regarding eligibility. However, the Internal Revenue Service (IRS) recently released frequently asked questions which state the administrator may rely on a participant’s certification that the individual satisfies the conditions to be qualified unless the administrator has actual knowledge to the contrary.
The CARES Act allows eligible participants to take up to $100,000 from a qualified retirement plan without the 10% early withdrawal penalty. This distribution does not require a participant to take a loan before taking a Coronavirus-related distribution (which may differ from the plan’s hardship withdrawal provisions). The participant is not required to repay the amount, but repayments are permitted within three years. Amounts that are not repaid are subject to income taxes, with the distribution generally included ratably in taxable income in each of the three years following the distribution. However, participants have the option to include the entire distribution in income for the year of distribution. IRS guidance is expected as to how the timing and amount of repayments will affect the amounts included in each year’s taxable income. Employers should be aware that the limit of the distribution is $100,000 per participant per year.
Coronavirus plan loan provisions
The CARES Act also eased some rules related to plan loans in order to provide another way for participants to access cash in the short term. The CARES Act increased the maximum loan amount to the lesser of $100,000 or the participant’s entire vested account balance/accrued benefit for loans taken between March 27, 2020 to September 23, 2020. Additionally, the CARES Act provides that loan repayments due between March 27 and December 31, 2020, can be delayed for up to a year. The loan would need to be reamortized in 2021 for the remaining repayments similar to how a loan may be reamortized following a participant’s leave of absence.
Plan sponsors should be aware that many plans limit participants to one loan at a time. Participants who already have the maximum outstanding loans permitted in the plan, may not take a CARES Act loan unless the plan is amended to permit additional participant loans.
Plan sponsors should be aware that many plans limit participants to one loan at a time.
Waiver of RMDs
Individuals subject to RMDs can waive those distributions for 2020. Those who received RMDs before the passage of the CARES Act can roll over those distributions into a qualifying account. Rollovers typically must happen within 60 days of the RMD. The IRS has issued guidance indicating that any tax deadline falling between April 1 to May 15 will be extended to July 15. Under this guidance, withdrawals taken from February 1 to May 15 must be rolled over by July 15. Withdrawals that occurred prior to February 1 may not be eligible for rollover.
Remedial amendment periods
Plan sponsors can give participants access to these benefits immediately as long as they make the required amendments to plan documents before the last day of the first plan year beginning on or after January 1, 2022.
For more information on how these provisions affect your business and retirement plans, please contact Plante Moran.