CARES Act retirement plan relief: What employers should know

The CARES Act, signed into law on Friday March 27, 2020, provides aid to companies that sponsor a retirement plan and employees who participate in these plans.

The CARES Act enhancements for retirement plans were enacted to assist retirement plan participants by offering a special distribution, expanded loan features and relief from required minimum distributions. These enhancements are important as they are additional benefits that can be made available to participants who are experiencing or will experience financial and other hardships.

The following information is intended to help you in deciding whether to adopt the CARES Act enhancements for you and your employees.

CARES Act Distribution

The CARES Act allows for a special distribution with special criteria and modified tax treatment (referred to as the “Cares Act Distribution”). The distribution may be taken from any eligible retirement plan including qualified plans, IRAs, 403(b) plans and governmental 457 plans.

• A qualified individual (see description of a “qualified individual” below) may take a distribution up to $100,000.00 of their fully vested account balance.
• Pursuant to these regulations, this opportunity is available until 12/31/2020.
• The typical 10% early withdrawal penalty tax is waived for this type of distribution.
• Participants of any age may take the distribution.
• The typical 20% mandatory tax withholding is waived for this type of distribution.
• Taxes will still be due, by the participant, but can be paid over a 3 year period.
• If a participant repays the withdrawn amount back into a qualified retirement plan account (e.g. 401k, IRA, etc.), the amount will not be taxed as ordinary income to the participant. Such repayments would not count as a contribution toward IRS mandated annual contribution limits.

The CARES Act does not allow for this type of distribution from a Defined Benefit, Cash Balance or Money Purchase Plan.

CARES Act Loan

The CARES Act loan for qualified individuals (see description of a “qualified individual” below) increases the available loan amount and offers extended loan repayment periods. If your retirement plan currently allows participant loans, a participant can take out a higher loan amount and/or delay repayment of new and existing loans, if they qualify.

For new participant loan requests:

• A participant must self-certify they are a qualified individual.
• New Loans
  -The participant must request the new loan within 180 days of the effective date (March 27, 2020) of the CARES Act.
  -This provision is available for new participant loans made on or before September 23, 2020.
  -The maximum limit for a loan to a qualified individual is increased to 100% of the individual’s vested account balance or a maximum amount of $100,000.

For existing participant loans:

• A participant must self-certify they are a qualified individual.
• For existing participant loans, participants may increase their loan amount if applicable and/or delay loan repayments for up to 12 months.

Repayment suspension (applies to new and existing participant loans):

• New participant loans: Any new loan taken in the period above may have repayments delayed for up to 12 months, as well.
• Existing participant loans: Qualified individuals may delay, for up to 12 months, any loan repayment that is due between enactment of the CARES Act on 3/27/2020 and 12/31/2020.
• If a participant delays payment, their total repayment period is extended by that same amount of time (giving participants longer than the traditional IRS mandated 5 years to repay).

Qualified individual and self certification

A CARES Act distribution or loan is available to a qualified individual for the following reasons:

• The participant has been diagnosed with the virus (as confirmed by a CDC-approved test);
• The participant’s spouse or dependent has been diagnosed with the virus; or
• The participant has suffered financially from the pandemic because (any or all reasons):
  – The participant was laid off, furloughed, quarantined, or had hours reduced.
  – The participant cannot work due to the unavailability of childcare because of the pandemic.
  – The participant’s own business has had to close or reduce hours.

The CARES Act allows a Plan Administrator to rely on a participant’s self-certification that they are a qualified individual. Distributions are also available for beneficiaries of deceased participants.

• This self-certification requirement applies to the CARES Act Distribution and the CARES Act Loan.
• No further certification or authentication will be required of the Plan Sponsor/Plan Administrator.
• LRS will provide distribution and loan forms for this purpose and will require that a participant self-certify their eligibility for the distribution and/or loan.

Required Minimum Distribution (RMD) suspension

The Required Minimum Distributions normally due for payment during 2020 are not required from many qualified plans. This is intended to prevent affected participants having to liquidate investments now at a significantly reduced value and give time for value to recover.

RMDs are waived for any RMD:

• Due for payment by April 1 because a participant attained age 70½ during 2019 and the RMD has not been distributed.
• Applicable to all Required Minimum Distributions for 2020
• No RMDs due for individuals who have been taking RMDs in previous plan years
• Note: No new 70 ½ RMDs due to changes in SECURE Act
• Any RMDs due in 2020 not already distributed are waived.

Delay in funding for single employer defined benefit and cash balance Plans

**This applies only if your company sponsors a Defined Benefit or Cash Balance Plan**

Defined Benefit and Cash Balance plans are being given more time to make contributions that are due for deposit during 2020. Plan sponsors will have additional time to recover reduced revenue from mandatory business shutdowns.

• The due date for any defined benefit contribution during 2020 is extended to January 1, 2021
• Contributions would be related to 2019 plan year administration

For more information on the CARES Act, see CARES Act and SBA loans: How businesses can leverage loan relief.

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