The CARES Act: Implications for Retirement Plans
Gibbons Special Alert
April 3, 2020
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), the third COVID-19 stimulus package, signed into law by President Trump on March 27, contains a number of important provisions affecting tax-qualified retirement plans and IRAs. The provisions expand the rights of participants to in-service distributions from retirement plans and IRAs and loans from retirement plans, and waive the requirement to take required minimum distributions in 2020 from retirement plans and IRAs. The provisions also defer the date for a plan sponsor to make minimum funding contributions to single-employer defined benefit plans.
The plan sponsor generally has the discretion to decide whether to use the in-service distribution and loan provisions and whether to defer minimum funding contributions. If the IRS treats the waiver of the required minimum distribution requirement the same way it treated the waiver of this requirement for 2009 distributions, the plan sponsor will also have the discretion to decide whether to forgo required minimum distributions in 2020.
From a market perspective, taking distributions and loans now can have a significant adverse impact on the account balances of participants over the long term. Many account balances have experienced significant losses, and making withdrawals now will prevent the account balances from recouping these losses should the markets recover.
The CARES Act repeals for coronavirus-related distributions the 10 percent early distribution tax for distributions made before an individual attains age 59½. The repeal applies to distributions of up to $100,000 in the aggregate in 2020 from all defined contribution plans of the individual’s employers and members of each employer’s controlled group and the individual’s IRAs. The distributions may be made from all contribution sources, such as salary deferrals, matching contributions, and non-elective contributions.
The distributions are not subject to the mandatory 20 percent federal income tax withholding; rather, 10 percent withholding will apply unless the participant elects out of withholding. Since the distribution is not an eligible rollover distribution, the plan administrator does not have to provide direct rollover notices and the Section 402(f) tax notice.
An individual may re-contribute all or a portion of the amount distributed in one or more contributions to any eligible retirement plan that accepts rollover contributions, or an IRA, within three years after the date of distribution. The limit on contributions does not apply to the amount re-contributed. Any re-contribution is treated as a direct rollover, or if made to an IRA, as a trustee-to-trustee transfer, without regard to the 60-day contribution period for rollovers. One-third of the distribution is included in income each year over the three years of 2020, 2021, and 2022, and the individual may elect to include the entire distribution in income in the year of distribution. Any re-contribution reverses the inclusion in income.
A coronavirus-related distribution means a distribution to an individual: (a) who is diagnosed with COVID-19 or SARS-CoV-2 with a CDC-approved test; (b) whose spouse or dependent is diagnosed with COVID-19 or SARS-CoV-2 with a CDC-approved test; (c) who experiences adverse financial consequences due to being quarantined, furloughed, or laid off, or having work hours reduced, due to the virus or disease; (d) who is unable to work because of lack of child care due to the virus or disease; (e) who has closed or reduced hours in a business owned or operated by the individual, due to the virus or disease; or (f) who has experienced other issues as determined the Secretary of the Treasury.
The plan administrator can rely on the individual’s certification that he or she qualifies for a coronavirus-related distribution. In addition, the plan administrator does not have to inquire whether the individual received coronavirus-related distributions from the plans of unrelated employers and IRAs.
Regardless of whether a plan expressly provides for coronavirus-related distributions, the 10 percent early distribution tax will not apply to any distribution that qualifies as a coronavirus-related distribution. For example, if a 40-year-old participant is laid off due to COVID-19 and the participant takes a $20,000 distribution due to the layoff, the 10 percent early distribution tax does not apply. The same result will apply to a distribution that qualifies as a coronavirus-related distribution made pursuant to a plan’s hardship distribution provisions.
The CARES Act increases the limit on plan loans for qualified individuals from $50,000 to $100,000, and the cap from 50 percent of the individual’s account balance to the entire account balance. The increase applies to loans taken during the 180 days from the date of enactment, which is from March 27 to September 23, 2020. For both outstanding plan loans and loans taken during this 180-day period, the due date for any loan repayment that occurs from March 27 to December 31, 2020 is extended for one year. The loan is then re-amortized to reflect the missed payments, together with interest due on the missed payments. The term of the loan is also extended for the period of the missed payments. For outstanding plan loans, the one-year extension appears mandatory.
A qualified individual is an individual who qualifies for a coronavirus-related distribution.
Required Minimum Contributions
The CARES Act waives required minimum distributions in 2020 from defined contribution plans and IRAs, whether they must be taken by December 31, 2020 or April 1, 2021. Minimum distributions with a required beginning date of April 1, 2020 for individuals who turned 70½ in 2019 that were not made by January 1, 2020 are also not required. Required minimum distributions are calculated based on the December 31, 2019 account balance. Since account balances as of this date have often experienced significant losses, the waiver prevents individuals from taking a disproportionately high required minimum distribution for 2020.
Should a plan sponsor wish to use the in-service and plan loan provisions, or the waiver of required minimum distributions, it can do so now. The plan sponsor will need to amend the plan document to reflect the immediate changes in plan operation by the last day of the first plan year beginning on or after January 1, 2022. Amendment of governmental plans must be made by the last day of the first plan year beginning on or after January 1, 2024.
Deferral of Defined Benefit Plan Minimum Funding Contributions
The CARES Act defers minimum funding contributions to single-employer defined benefit plans for 2020, including quarterly contributions, until January 1, 2021. The plan sponsor must pay the contributions with interest on that date at the plan’s interest rate from the original contribution due date through the payment date. In addition, in determining the benefit restrictions for an underfunded plan for plan years that contain the 2020 calendar year, the plan sponsor may elect to apply the plan’s adjusted funding target attainment percentage for the plan year that ended in 2019.
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