CARES Act – Plan Changes for COVID-19 Relief

March 27, 2020 in Advice, Legislation

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), became law today after Senate, House and Executive Branch approval.  The $2.2 trillion (yes, TRILLION) stimulus package provides sweeping relief to Americans suffering COVID-19 hardships.  The new law also includes extensive provisions impacting workplace retirement plans. 

The biggest piece of the CARES Act for workplace retirement plans is relaxing hardship withdrawal rules allowing participants to take a withdrawal of up to $100,000 without the 10% excise tax for Coronavirus related hardships.  This can be paid back over three years and the taxation of what’s not paid back can be spread over three years as normal income.  Also, for next six months, loan access is increased from 50% of your eligible account balance with a maximum of $50,000 to 100% of your eligible account balance and a maximum of $100,000.

You will have a choice in deciding whether to add CARES Act options to your retirement plan.  While there are participants who need immediate help, we are concerned that this window may result in excessive withdrawals that are not in the "spirit" of the relief.  The scope of the changes could be disastrous for many participants if maximized.  Any loan or withdrawal can severely impact an employees' retirement savings accumulation.  Should you choose to adopt the provisions, please contact us to discuss ideas on how to mitigate this unintended consequence.  

Additional details on the major provisions of the CARES Act are below.  


Major Provisions of the CARES Act Impacting Workplace Retirement Plans


Waiver of 10% tax on early distribution

The bill waives the 10% “early distribution” penalty for “coronavirus-related distributions” of up to $100,000 from tax-qualified plans.  Participants taking these distributions may repay them, or contribute them as a “trust-to-trust” transfer to another plan, within three years of the distribution.  The distribution may be included in income (for income tax purposes) ratably over three years.  For purposes of this rule, a “coronavirus-related distribution” means any distribution from a tax-qualified retirement plan made on or after January 1, 2020, and before December 31, 2020, to an individual:

  • Who is diagnosed with a disease designated as coronavirus by a test approved by the Centers for Disease Control and Prevention;
  • Whose spouse or dependent is so diagnosed; or
  • Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the coronavirus, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

For this purpose, the plan administrator may rely on an employee certification.


Liberalization of plan loan rules

With respect to plan loans to qualified individuals (defined as those who would be eligible for a coronavirus distribution [see above]), the bill increases, for 180 days from the date of enactment, the dollar limit on plan loans from

$50,000 to $100,000 and the percentage limit from 50% to 100% of the present value of the participant’s account.  The due date for repayment of an outstanding loan of any qualified individual that occurs from the date of enactment to December 31, 2020 is delayed for one year. 


RMD rules waived for DC plans

The required minimum distribution (RMD) rules are generally waived for 2020 for defined contribution plans.


ERISA minimum funding for 2020

Delay in application of minimum funding rules. Any ERISA-required minimum contributions to a defined benefit plan due during 2020, including quarterly contributions, are delayed to January 1, 2021, at which time the amount due will be increased for interest.  2019 funded ratio may be used for determining benefit restrictions. In determining whether a plan is less than 80% funded and subject to, e.g., benefit restrictions, a sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the 2019 plan year as the AFTAP for the 2020 plan year.

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