On March 27, 2020, the Coronavirus, Aid, Relief and Economic Security Act (CARES Act) was passed into law, providing financial relief for Americans and businesses adversely impacted by the COVID-19 pandemic. Within the CARES Act, there are retirement plan provisions related to withdrawals, plan loans and required minimum distributions (RMDs) to offer both relief and flexibility to plan participants.
In addition, there are provisions specific to employers that sponsor defined benefit plans that offer relief for funding obligations arising during the 2020 plan year.
We are highlighting the provisions that most prominently impact 401(k) and 403(b) plans.
Coronavirus-Related Early Distributions
The CARES Act allows plan sponsors to amend their plan to offer penalty-free distributions for coronavirus-related purposes of up to $100,000 until December 31, 2020.
In order to be eligible for this withdrawal, the participant, or his or her spouse or dependent, must be diagnosed with COVID-19 or the participant must have experienced adverse financial consequences due to being quarantined, furloughed, laid off, having work hours reduced or being unable to work due to lack of childcare or closures related to the pandemic (COVID-19 Impacted Participant).
Participants would self-certify that they meet the eligibility criteria, and the distributions remain subject to income tax. Coronavirus-related distributions carry special treatment such as:
- The 10% early withdrawal penalty normally associated with distributions prior to age 59 ½ will not apply
- Regular income taxes due from the withdrawal may be spread out over a three-taxable-year period
- The amount withdrawn may be repaid to an eligible retirement plan within three years; repayments are not subject to plan contribution limits and will be treated as rollover contributions
While this option may be helpful for people who are in a dire financial circumstance and need the cash flow, taking a significant distribution in a volatile time may not be ideal. Participants should apply careful consideration to the decision of taking a distribution and understand the tax consequences.
Increased Loan Limit and Extension of Repayment
For COVID-19 impacted participants noted above, plans may also provide increased loan flexibility to new or pre-existing qualified loans.
- The maximum loan amount is temporarily increased to $100,000 or 100% of the vested balance for loans taken within 180 days of the enactment (or by September 23, 2020)
- Loan payments due through December 31, 2020 may be delayed for one year
- Loan durations (including the 5-year maximum) may be disregarded if payments are delayed
Loans belonging to participants who are not impacted by COVID-19 retain existing loan provisions, such as the limit of $50,000 or 50% of a participant’s vested plan balance.
Any required minimum distribution (RMD) expected to be made in calendar year 2020 is waived for defined contribution plans including 401(k), 403(b), 457(b) and IRAs. The purpose of this waiver is to provide relief to those who would otherwise be required to withdraw funds during the economic slowdown attributed to COVID-19, and to avoid a disproportionately large distribution relative to the declining market after December 31, 2019. It’s important to note that another piece of recent legislation, the SECURE Act, updated the initial RMD age to 72 (from 70 ½) for those who would’ve been otherwise due to take their initial RMD in 2020.
Plan Administration Considerations
Retirement plan providers will provide specific information on how their systems and processes will be updated in light of the options outlined in the CARES Act. Eventually, plan documents will need to be updated to reflect any of the new options related to loans and distributions:
- The amendment deadline for non-governmental plans is the last day of the 2022 plan year
- The amendment deadline for governmental plans is the last day of the 2024 plan year
- The Treasury Department is given authority to extend these deadlines
In addition, the DOL has authority to waive or delay ERISA-imposed deadlines. However, it’s important that plan sponsors do not assume a deadline has been adjusted. Assurance Financial Services (AFS) will keep our plan sponsors informed on any adjusted deadlines and guidance.
Partial Plan Terminations Due to Layoffs
While not specific to the CARES Act, companies in industries hit particularly hard by the financial impact of COVID-19 should be mindful of partial plan termination rules. These rules require plans to 100% vest all participants who are impacted by a partial plan termination. The occurrence of a partial plan termination might occur as a result of layoffs. The Internal Revenue Service (IRS) has a presumptive threshold of a 20% reduction in force as triggering a partial plan termination, but this is ultimately a facts and circumstances determination that may require legal guidance.
According to IRS guidance, an "employer-initiated severance from employment" for this purpose generally includes any severance from employment other than on account of death, disability or retirement on or after normal retirement age. This appears to include employees who are fired, even for cause or if due to adverse business conditions. However, the IRS guidance indicates that an employee who voluntarily terminates is not an “affected employee.” Furloughed employees would generally not count as terminated for purposes of a partial plan termination.
This is an incredibly complex and fluid time for both individuals and companies, with information changing regularly. Please reach out to AFS with any specific questions. In addition, the National Association of Plan Advisors (NAPA) has a great resource for frequently asked questions related to the CARES Act. For more information regarding the CARES Act, please see the full act text here.